“Payday Loan Reform Act” Doesn’t Contain Much Reform

Last week’s Congressional hearing on the “Payday Loan Reform Act” (HR 1214) featured a dramatic confrontation between the bill’s sponsor, Rep. Luis Gutierrez of Illinois, and the Consumer Federation of America’s Jean Ann Fox, the nation’s leading expert on – and critic of – the payday lending industry.  (Sarah blogged about H.R. 1214 yesterday.)

The drama flowed from the fact that Gutierrez is also a strong critic of the industry. He sponsored the 2005 Military Lending Act that succeeded in outlawing payday lending to military personnel and their families, and near military bases, and has been a strong proponent of much pro-consumer legislation.

Gutierrez argues that the industry’s political clout makes it impossible to pass the sort of legislation that he would like to see. He also argued that his bill would at least provide minimal protections against the most abusive pricing and practices of payday lenders to over one hundred million consumers in the 23 states where the industry is currently allowed to charge even more than his bill would allow.

HR 1214 would allow payday lenders to charge $15 per $100 borrowed – which for a two week loan amounts to an annual percentage rate of 391%. (If the borrower had a year to repay the loan, the APR would be 15%; but since the loan must be repaid in two weeks, which is one twenty-sixth of a year, the rate is 26 time 15% – plus 1% more for the 365th day in the year – for 391%.) It would also require disclosures in payday stores and on loan documents, prohibit one loan from being immediately “rolled-over” into another, allow consumers who can’t repay their loan on the due date to get a three-month extended payment plan.

There are two major problems with this bill.

Problem number one: the bill wouldn’t do what it claims to do. As it has shown in individual states that have imposed similar restrictions, the industry is able to find loopholes and continue business more or less as usual. Jean Ann gave examples in her testimony of how the language of HR 1214 could be easily evaded. For example, its definitions of “payday lender” and “payday loan” don’t cover the way that payday lenders currently operate (under other names) in Illinois, Texas, and Virginia.

A detailed study by the Center for Responsible Lending demonstrated that the only way to end payday lending abuses is to have an across-the-board interest rate limit of approximately 36% — the type that 15 states and DC now have in place. In short, we predict that industry would find ways around the provisions, and that if H.R. 1214 passes the debt trap will continue unabated.

Problem number two: the bill would give much desired legitimacy to the industry, which would be able to claim that its operations have received Congressional approval. In effect, H.R. 1214 condones the payday business model, and approves of triple digit interest rates.

This could well 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.)

That’s why AFFIL and our Partners are calling H.R. 1214 the “Payday Lender Protection Act” (PDF). Our position now is the same one that Rep. Gutierrez favored a year ago – we want to put the payday lenders out of business altogether.

To that end, we are supporting the “Protecting Consumers from Unreasonable Credit Rates Act,” (S 500, sponsored by Senator Durbin, and HR 1608, sponsored by Rep. Speier). This bill would limit APRs for any type of loan to 36%, thereby extending to all borrowers everywhere in the country the protections that Congress has already given to military personnel and that 15 states and DC have already provided to their own residents.

A limit of 36% may seem high, but it is low enough to put an end to such types of predatory short term lending as payday loans, auto-title loans, and refund anticipation loans.