Lawmakers Protect Payday Lenders, Not Their Customers

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A invoice to limit payday loans as the Times editorial board defended On Monday deceased in a state Senate committee on Wednesday, after several lawmakers said they feared the bill would cut consumers at bay from an easy source of money.

What am I saying, really?

The measure, SB 515, aimed to do three things. First, it would have prohibited lenders from making more than six payday loans to one person per year. To enforce this restriction, the government would have had to set up a database (at the expense of the lenders) tracking the payday loans issued. Second, it would have doubled the minimum period for a borrower to repay a loan, from 15 to 30 days. And third, it would have forced lenders to offer borrowers who cannot repay their loans on time the option of repaying them in installments over a few months.

Payday lenders argued that the new rules would have bankrupted them, leaving consumers at the mercy of less regulated online fast outlets. If this is true, this implies that the livelihoods of the industry depend on clients who take out seven or more loans per year, or those who issue bad checks to the lender and therefore may be charged more fees while ‘They are struggling to repay their loans.

It turns out that the State Department of reports that the average customer of a personal loan took out between seven and eight loans in 2011, the latest year studied. And 7.5% of post-dated checks issued to lenders that year were bounced, although lenders were able to recover more than two-thirds of the money owed to them.

So it is clear that the industry is making a lot of money from people who live so close to their financial limit that they need repeated injections of money, or who cannot repay what they borrow quickly. This flies in the face of the industry’s claim that payday loans are for people who are suddenly faced with a big bill they weren’t expecting – for example, a cracked tooth or a breakdown. car – and who just need temporary help.

The political question is whether these borrowers should be able to take out a high cost loan after a high cost loan, or if they should have a better alternative. Critics of payday companies, including the Center for Responsible Lending, say loans can become a debt trap for people who live paycheck to paycheck. They are asking, rightfully, how a person who did not have enough surplus from their last check to cover $ 255 in expenses could find $ 300 to save in their next check to pay off the payday loan. Most likely, that person would have to take out another payday loan soon after to fill the gap left by the last one. This is how a person goes from a loan to a need of seven or more.

Paul Leonard, state director of the Center for Responsible Lending, noted that the legislature has reduced subsidies for work welfare, medicare for low-income people and other welfare programs in recent years. years. It is ironic, he said, that lawmakers’ only empathy for these families is when groups like his threaten to limit access to “very high cost debt products.”

Payday companies also complain that they are already heavily regulated, but that’s only true if you ignore how much state and federal governments oversee more conventional lenders. Governments impose many rules on lenders to protect consumers not only from being misled, but also from being exploited when they are in dire straits. SB 515 may not have been perfect legislation, but it was in line with what the government is trying to do in the financial sector.

Nonetheless, if industry critics tried again to prevent payday lenders from capitalizing on the financial difficulties of low-income borrowers, they would have to look for ways to make more suitable forms of credit available. As a reader “juanq40” Noted in response to the Times editorial, consumers generally cannot get installment loans for amounts less than $ 2,500. The state has tried a few pilot projects with small installment loans, but the business has yet to gain traction.

Perhaps those who would like to limit the number of payday loans per consumer could pair this proposal with a new initiative on low installment loans. That way, at least, they would have an answer when lawmakers say they fear cutting off their less fortunate voters after half a dozen payday loans.

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Follow Jon Healey on Twitter @jcahealey


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