Congress Thinks a 391% APR is A-Okay

Last week, the House Subcommittee on Financial Institutions and Consumer Credit held a hearing on H.R. 1214, the Payday Loan Reform Act.  AFFIL and our Partners are calling this the “Payday Lender Protection Act.”  It’s the first bill that AFFIL has ever officially opposed (PDF link).  Unfortunately, the bill enjoys a lot of support and the full House could vote on it soon after they return from recess.

The bill would allow payday lenders to charge $15 per $100 borrowed – which for a two week loan amounts to an annual percentage rate of 391%.  Over 80% of AFFIL members and 48% of the general public think 36% interest is too high, let alone 391%.  Of course, a 36% cap is the best we can hope for in our crazy world, and would be a big improvement over the status quo.  (See this previous post on Senator Durbin’s “Protecting Consumers from Unreasonable Credit Rates Act” for more info.)

It might seem that $15 is not a ton of money to pay for a short-term loan.  But the devil of payday lending is in the “roll-overs.”  Customers who cannot pay their loans back within the two weeks—which is almost everyone—end up paying another fee to float the loan for another two weeks.  The average payday customer rolls their loan over eight times, and pays $793 for a $325 loan.

Consumer groups and industry are both opposing H.R. 1214, despite the fact that the industry supported most of the bills’ provisions when they were contained in state-level bills.  We’re not sure why the flip-flop here.

Representative Luis Gutierrez (D, IL) is the author of the bill, and he wants it to end rollovers and the debt treadmill.  But state-level experiences with provisions meant to end rollovers show that these provisions are easily evaded.  In other words, we predict that industry will find ways around the provisions, and that if H.R. 1214 passes the debt trap will continue unabated.  The difference is that if it passes, the trap will continue unabated with Congressional blessing.

In effect, H.R. 1214 condones the payday business model, and approves of triple digit interest rates.  It will also stop progress against payday lending at the state level, where the momentum has favored consumers since 2005.  No state  has legalized high-cost payday lending since then, and three states plus the District of Columbia have outlawed it.  (To see all 15 states that ban payday lending, click here.)

The North Carolina Commissioner of Banks showed that after North Carolina banned payday lending, its residents did not miss the practice one bit.  This flies in the face of the Congressional perception that consumers absolutely must have access to high-cost short-term loans.  But, as two recent articles point out (The Hill and the AP), Members of Congress are increasingly hearing from payday lobbyists who are ramping up their presence on Capitol Hill—and, of course, their donations to Members’ campaigns.

The fact is, consumers are better off without payday lending.  Congress is way out of step thinking that a 391% APR should be condoned.

(Photo:  Gregory F. Maxwell)