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Payday Lenders Fight Back in State Legislatures

Usurers Claim They are "Legitimate"

By Mark Huffman
ConsumerAffairs.com

February 21, 2007

Payday Lenders • Payday Loan Lead Generators Settle FTC Charges • Tiny Virginia Town Stands Up To Payday Lenders • Payday Lenders Targeting Seniors • Payday Lenders Trumpet False Claims, Critics Charge • Pentagon's Predatory Lending Rules Faulted • Last Payday Lender Leaves West Virginia • Pennsylvania Class Action Challenges Payday Lender • Payday Lenders Fight Back in State Legislatures • Payday Lenders Fleece Consumers for $4.2 Billion A Year • Soldiers Pinned Down by Predatory Payday Loans • California Sues Payday Loan Business • North Carolina Declares Victory In War On Payday Lending • H&R Block To Settle More Payday Loan Suits • DOD: Payday Loans Affecting Military Readiness • States Want FDIC Crackdown on Payday Lenders • No Payday for Payday Lenders in Texas, New York • Payday Lenders Prey on African-American Neighborhoods • Payday Loan Report: Reform Needed • Illinois Warns of Payday Loans • Fast Cash Loans Charged with Illegal Practices • Cashback Payday Loans Banned in NY --- • Video: What is a Payday Loan? • Consumer Complaints

With various state legislatures in session across the U.S., the payday lending industry is leading an all-out effort to turn back efforts to ban or impose new rules on the industry.

Currently, lawmakers in Arkansas, South Carolina, Oregon, Washington, Rhode Island, New Mexico and Indiana are considering tightening the rules on payday lenders.

Virginia is one of the hottest battlegrounds, where the industry is running radio and print ad campaigns against reform efforts. So far, they've managed to squelch a dozen reform bills. One however, has passed the Virginia House and could find its way to the governor's desk.

"The industry has hired as many as 18 lobbyists in Virginia, so that shows you how much they think is at stake," Chris Cooper, Director of State Legislative Affairs for the Center for Responsible Lending, told ConsumerAffairs.com.

Payday lenders are also trying to overturn a recent payday loan ban imposed by Georgia. Cooper says the ban was imposed with the strong support of the U.S. Department of Defense, which has long complained that its enlisted personnel are preyed upon by payday lenders.

"The testimony of a navy petty officer, who became so deep in debt that he lost his security clearance, was instrumental in Georgia imposing that ban," Cooper said.

The industry defends itself, saying it provides a service to low-income consumers with poor or no credit. Banks will not lend them money, industry backers say, so "cash advance" stores or payday lenders fill a critical need.

Critics like Cooper counter that rather than providing a service, the payday lending industry is exploiting low-income consumers, trapping them in a spiral of debt. If a consumer borrows $100, a payday lender typically collects a fee of 15 percent, in this case $15.

That might not sound like much, but for a two-week loan, it amounts to an annual interest rate of 390 percent -- and is typically about what street-level mobsters charged for loans in the early 20th century before organized crime was "eliminated" and usurious lending was legalized.

If the payday lender were limited to charging an annual rate of 30 percent, the fee paid by the consumer would only be $1.15 on a two week loan.

"The industry is built on getting about 400 percent on their loans, making it an extremely profitable business. They could operate with a cap of 30 to 36 percent, but they don't want to do that," Cooper said.

Cooper says North Carolina banned payday lending in 2001 after a five-year experiment of tightly regulating these cash advance stores. Cooper says the state finally gave up when it became clear that, in spite of limits, consumers were repeatedly taking out these expensive loans and burying themselves in debt.

In fact, research conducted by the Center for Responsible lending shows that the payday lending business model is designed to keep borrowers in debt, not to provide one-time assistance during a time of financial need. According to CRL's research, borrowers who receive five or more loans a year account for 90 percent of the lenders' business.

"The debt trap is the payday lending industry's life blood," Cooper said.

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