Another Voice / Financial regulation
Tommy Moore: Eliminating payday loans doesn’t eliminate the need
These are tough economic times, and Congress is trying to successfully guide our nation back onto solid economic footing. However, it is critical that lawmakers on Capitol Hill do not make the mistake of using the financial crisis as an opportunity to eliminate the payday lending industry.
To prevent any confusion, a payday loan is a two-week loan, generally around $300, and the fees associated with the loan are about $16 for every $100 borrowed. Payday loan stores are not title lenders, installment lenders or check cashers.
The effort to kill the payday lending industry is being spearheaded by two top lawmakers in Washington, D. C. Rep. Luis Gutierrez, D-Ill., has introduced legislation in the House of Representatives that would make many payday lending stores across the United States unprofitable by setting a national cap on all payday loans at $15 for every $100 borrowed.
In the Senate, a bill has been introduced by Sen. Richard Durbin, D-Ill., that would essentially close every payday lending store in the United States. The senator’s legislation enforces a 36 percent annual percentage rate for all loans. This means payday lenders can charge only $1.38 per $100 borrowed over a two-week loan, a fee so low it will put stores out of business.
Backers of Durbin’s legislation insist that the industry is crying wolf and can live with these restrictions. However, in states that imposed similar lending caps, payday lending stores are about as common as snowstorms are in Miami.
In states where payday lending has been eliminated, bankruptcies and other types of financial hardships have increased, according to research.
Even if payday loans are outlawed, millions of people will still need quick access to cash. For some, a short-term loan means the difference between fixing a car and losing a good paying job in a recession. For others, it means stopping a utility company from turning off their means of cooking, bathing or cooling off. Some use payday loans to avoid bouncing checks and paying fees assessed by banks, often much higher than what payday lenders charge.
One troubling aspect of the payday lending debate is the assertion that we charge people 600 percent interest rates for the loan. This is absurd. The 600 percent interest rate referred to by our critics is an annual rate. Payday loans are taken only for two weeks.
Despite our opposition to being banned, the payday industry has repeatedly welcomed reasonable regulation. In fact, our industry has worked with 34 state legislatures to support laws that protect customers and preserve access to small-dollar, short-term credit. But if Gutierrez and Durbin are successful, it won’t prevent people from needing emergency cash or requiring our services. It will only mean that Americans have one less option for short-term loans and that they will be forced into more expensive alternatives.
Tommy Moore is executive vice president of the Community Financial Services Association of America.
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