I pretty much assumed that the 36% rate cap on payday loans was a goner when Assembly Speaker Mike Sheridan signaled that he didn’t like it. (Hmmm…. and hmmm…)
So now we’re faced with a revision of an alternative bill, a compromise hammered out by Jason Fields, Gordon Hintz, Andy Jorgensen, Donna Seidel, Jeff Smith, and Josh Zepnick--basically all of the folks who introduced earlier, and sometimes clashing, legislation.
The new bill, dubbed the Responsible Lending Act, will get a hearing Wednesday.
Here are some thoughts:
- Motor vehicle title loans are prohibited. This is a good thing, because the folks who take out these loans have no other alternative. Either they don’t have a paycheck, and can’t get a payday loan, or they’re maxed out. The problem with vehicle title loans is that if the person can’t make the payment, they lose their car. And when you lose your car you lose a whole lot more. So while some may say that this ban takes away “consumer choice,” it’s actually a good thing. Hopefully it will steer these individuals into better loans.
- The bill applies to licensed lenders who make consumer loans for a term of 90 days or less. Payday lenders are prohibited from making a payday loan that exceeds, in principal amount and interest, $600 or 35% of the applicant’s gross biweekly income, whichever is less. No other restrictions on interest are created.
|
|
This sounds like a good thing, but consumer advocates argue that this type of restriction can still set someone back. He or she may have other outstanding lines of credit and other bills to pay, but this payday loan will get paid off first. That could prevent someone from paying their rent or mortgage or other important bills.
- Individuals would not be able to roll over an existing payday loan, nor would they be able to take out more than one payday loan at a time. They’d have to wait more than 24 hours before taking out another loan.
The state Department of Financial Institutions would have to set up a database, which would update in real time, data about the person to keep track of their loans. (The database would be confidential.)
Again, this seems wise, since a lot of folks simply pay off one loan by taking out another loan, sometimes at the same place, sometimes by simply crossing the street, and using the second one to pay off the first one.
- A payday loan may not accrue interest after the loan maturity date and may not include any penalty arising from the customer’s prepayment, default, or late payment except that a payday loan provider may charge a $15 if the individual’s check is returned for nonsufficient funds. Again, this sounds pretty good.
- If the borrower could not pay off his or her loan, the lender could set up a payment plan made up of four installments over the next four pay periods.
- The payday lender would have to disclose all fees and costs and APR at least 15 minutes before making the loan.
- Borrowers could sue a lender if it doesn’t comply with the statute.
Now, here’s the catch. The Center for Responsible Lending (CRL) found that these types of measures do nothing to help people stay out of the debt trap:
Finding #2: As implemented in any state, none of these restrictions have stopped payday
lending from trapping borrowers in long-term debt:
- Renewal bans/cooling-off periods
- Limits on number of loans outstanding
- Payment plans
- Loan amount caps based on a borrower’s income
- Databases which enforce ineffective provisions
- Regulations that narrowly target payday loans
Borrowers take out one loan, pay it off, then, almost as soon as the cooling off period ends, take out another loan.
This bill already has the support of Sheridan and Assembly Majority Leader Thomas Nelson (a huge critic of payday lenders). Nelson said he’d schedule it for a vote in the Assembly as soon as possible. Other consumer advocates are hailing it as a good step forward, although not as good as the 36% rate cap.
We’ll see what happens in committee tomorrow.
