I have to admit that my curiosity was piqued by the following Letter to the Editor in the Murdoch Street Journal (from here)…
Michael Calhoun, the head of the Center for Responsible Lending, asserts (Letters, April 18) that payday loans should be capped at 36% APR and endorses H.R. 1214, The Payday Loan Reform Act of 2009, for imposing limits.
At that rate, a loan of $200 for one month would generate $6 in interest. If Mr. Calhoun and the bill’s sponsors really think one can run a payday business by charging such a rate, they should set up shop. It is not hard to do. Clients will flock to their outlets instead of the “predatory” lenders they criticize.
The payday loan market is highly competitive and provides a needed service primarily for low-income people. Just let those folks try getting an instant loan from Citibank for $200 for one month. If H.R. 1214 is enacted, it will be back to thugs serving the low-income borrower market. That’s a “reform”?
Prof. Roger Meiners
University of Texas-Arlington
I read the original letter from Calhoun on H.R. 1214 referenced by Meiners (embedded in Meiners’ letter), which states the following…
While (H.R. 1214) includes provisions that sound good, experience in numerous states shows such steps do nothing to stop predatory payday practices. Nineteen states have tried to ban payday loan rollovers, to no effect. Payday lenders simply close out the loan and re-open it immediately, with the same cost to the borrower.
We support the 36% rate cap proposed in the Senate (S500) and the House (H.R. 1608), because it restores a common-sense protection and encourages responsible installment loans which provide true financial flexibility. More than 70% of Americans support an interest-rate cap of 36%, a generous rate by any calculation.
Besides, Meiners’ example above of the $200 loan only paying $6 in interest is ridiculous; as Calhoun explains in his letter…
Payday loans ensnare customers in a cycle of debt that on average results in a borrower paying $800 in interest and principal for a $300 loan.
Payday loans are secured with a customer’s check postdated to his or her next pay day. Payday lenders charge a hefty fee to hold the check until then, when the loan is due in full. But most customers in this bind can’t afford to repay the loan completely, so the lender cheerfully collects another fee and extends the loan to the next payday, over and over. The payday folks earn more than 90% of their fees from borrowers who take out five or more loans a year.
And as Amy Goodman of Democracy Now! points out (here)…
In the early ’90s, there were fewer than 200 payday lending stores in the country. Today it’s a $40 billion industry with more than 22,000 stores. There are more payday lending stores than McDonald’s and Starbucks combined. As more Americans are living paycheck to paycheck, the demand for payday loans is increasing.
And as far as H.R. 1214 goes, don’t expect it to provide the needed consumer relief, because, as noted here…
H.R. 1214 provides Congressional approval to payday loans at rates of 390 percent APR for two weeks or 780 percent APR for one week. The loan cap of fifteen cents per dollar loaned in HR 1214 authorizes lenders to charge $60 for a typical $400 loan, which is due in one pay cycle. This means that, for the typical borrower with nine loans per year, H.R. 1214 authorizes lenders to collect $540 in finance charges for a $400 loan taken out over an 18-week period.
The Associated Press recently put out a story about how the payday load industry has “deployed well-connected lobbyists and hefty sums of campaign cash to key lawmakers to save themselves.” The article says that the industry opposes the Payday Loan Reform Act of 2009, but this is probably just a convoluted ploy to align public opinion, which is against predatory lending, in favor of this weak bill.
And H.R. 1214 has been opposed by groups such as Consumers Union, ACORN, Americans for Fairness in Lending, etc.
The Open Congress post also tells us…
The Online Lenders Alliance, formed in 2005, nearly quintupled, to $480,000, its lobbying expenditures from 2007 and 2008. It contributed $108,400 to candidates in advance of the 2008 elections compared to about $2,000 in the 2006 contests. (Rep. Luis Gutierrez, Dem of Illinois, who heads the House Financial Services Subcommittee on Financial Institutions and Consumer Credit) was among the top House recipients, getting $4,600, while the top Senate recipient was Sen. Tim Johnson, D-S.D., a Banking Committee member who got $6,900.
An embedded article in the Open Congress post from Mike Lillis of The Washington Independent tells us that Gutierrez was once a vocal opponent of the payday loan industry. Too bad he and the other individuals involved with this bill have apparently been bought off in order not to “kill the golden goose,” thus perpetuating a business that does nothing but take advantage of those who can least afford it.
Oh, and by the way, I came across this on Roger Meiners, the author of today’s Journal letter (sounds like a smorgasbord of the typical right-wing policy groups – would I have expected any less from the Journal?).