Standing with consumer advocates in front of a Chicago payday loan store yesterday, Sen. Dick Durbin did not mince words about the effect these forms of credit are having on working people across the country. Describing the skyhigh interest rates as "totally out of hand," he called on Congress to enact his recently-introduced usury reform bill, which would cap annual interest rates for consumer credit at 36 percent. "Whether you're talking about credit card accounts, whether you're talking about these payday loan operations," he told reporters, "the interest rates they're charging now are nothing short of outrageous."
A coalition of consumer rights groups agreed. Standing shoulder to shoulder with the senior senator, Citizen Action/Illinois director Lynda DeLaforgue called the bill a courageous effort to protect American families. "People need access to good and fair credit," she said. "People do not need access to bad and predatory credit which strips them of their assets, their dignity, and all too often sends them into the courts and bankruptcy."
DeLaforgue and her colleagues are urging Congress to consider Durbin's bill, which they see as a better alternative than the Payday Loan Reform Act of 2009, introduced by Rep. Luis Gutierrez in his capacity as chairman of the House Subcommittee on Financial Products and Consumer Credit. The Chicago congressman made quite clear during a committee hearing last week that he thinks Durbin's bill is too restrictive to pass both chambers in its current state, given the industry's clout. And as Mike Lillis of the Washington Independent points out today, "Gutierrez should know":
The top contributor to his 2008 campaign was payday lender QC Holdings, which donated $10,100, according to the Center for Responsive Politics. Another payday powerhouse, the Online Lenders Alliance, contributed an additional $4,600.
But reformers don't think that the compromise legislation sufficiently protects borrowers. One major concern with Gutierrez' bill is that applies only to loans with durations of 91 days or less. Illinois' Payday Loan Reform Act of 2005 used a similar approach, only covering loans that had to be paid off within 120 days. But the payday lending industry simply stretched the terms of its loans beyond that limit to evade the new regulation. "Every time policymakers in Illinois take one step forward," said Woodstock Institute President Dory Rand at the press conference yesterday, "the industry finds a way around it and we take two steps back.”
At the state level, Rep, Julie Hamos is trying to close that loophole. A measure she took sponsorship of last week (HB 3901) would change the definition of "payday loan" to include any loan with a finance charge exceeding an annual percentage rate of 36 percent, not just those used over a 120 day period. While the powerful industry will be out in full force to beat back the legislation, targeting Democrats who have not yet voiced their support, DeLaforgue tells us that the bill could be heard in the House Financial Institutions Committee when the General Assembly returns to the capitol after spring break.
Meanwhile, consumer groups will push federal legislators to look at Illinois' payday loan experience before they ratify Gutierrez' reform. A senate aide told Lillis Tuesday that the Durbin bill “is likely to move” this year as part of a larger finance reform package being assembled by Senate Banking Committee Chairman Chris Dodd (D-Conn.). If true, that's a great sign.
Comments
Jer@PaydayLoanIndustryBlog.com (not verified) on Wed, 04/08/2009 - 12:27
Millions of consumers want and need these small, short-term, unsecured loans. a 36% cao on interest rates will result in the closing of all payday loan businesses in addition to pawn shops, rent-to-own stores, and more.
The result of these closing will be rampant crime and significant suffering by consumers not having access to cash.
It's all well and good to pass legislation in an attempt to protect consumers but there are zero alternatives being offered or developed. These are small ($200 - $500) unsecured loans. Legislating them out of existence will not eliminate the need for them by consumers in the USA, Canada, Au, UK and more.
A middle ground must be found to satisfy the rational legislators (Guiterrez), the payday loan industry and consumers!
$15 for a $100 unsecured loan lasting 2 weeks is not unreasonable.
Josh Kalven on Wed, 04/08/2009 - 12:47
Come on, Jer. Was there "rampant crime and significant suffering" prior to 1980, when the interest rate caps were lifted? Did the onset of high-interest, short-term loans suddenly quiet the rowdy streets? Give me a break.
All that has happened in the decades since is investors have poured their money into high-interest financial products and Americans have taken on back-breaking amounts of debt. This is the system you want to preserve?
Lee Bendinelli (not verified) on Thu, 04/09/2009 - 09:08
Josh I would like to be the first to welcome you to the 21st century. In this century we have some really cool ways to make people who don't have money feel like they do by offering them money that we all know they can't pay back. Josh, you probably never came up short before your payday and thus never needed to find a way to keep a bank from charging you a 2000% NSF fee for a $2.00 debit card purchase. We also have a brand new name for an entire class of consumer called the "Under-Banked or Unbanked" depending on your perspective. This fine group of American citizens have told the banks where to shove it and decided to go it alone. Brave souls that they are make up 65 million people, right here in the USA. Banks don't look out for their payday to payday needs. The banks have turned their backs on the working men and women without means. I can see it now, Josh Kalven's Underprivileged Loan Service, "where we charge 36% APR, but you only get one if you have the money to pay it back."
Anonymous (not verified) on Thu, 04/09/2009 - 09:21
@Josh - I'm not saying that the world cannot live without payday loans, but your argument doesn't work. There are many things that did not exist as they do today and we're all fine.
The big pink elephant isn't the interest rates, it's the fact that millions of people have negative savings. They should fix that and not get rid of this industry. 36% is getting rid of that and it's unfortunate that a US Senator is trying to put an entire industry out of business.
This is another example of a self righteous politician trying to save people from themselves. What he does not realize is that he's making voting, adult American's dumber. Instead of educating them, he's letting them off the hook and telling them it's ok and it's not their fault. What's next, establishing minimum income requirements before you can buy an iPod?
Rep. Guitierez is making this product affordable and letting the industry operate. Neither side like it, so it may work.
Josh Kalven on Thu, 04/09/2009 - 09:31
Look, if their motive is to really help the unbanked and those facing dire financial emergencies, why don't these lenders spread their individual repayment schedules out over the course of six months or a year (rather than two weeks) while charging the same fee? After all, they would certainly lower their default rate.
The answer: Because their profits depend on borrowers taking out MULTIPLE loans over the course of a year. This is the source of the bulk of their revenue -- not one-time borrowers, but instead those stuck in the debt cycle and juggling numerous loans over the course of a given year. That's why the APR is applicable.
I agree that overdraft and ATM fees charged by conventional banks need to be reined in as well. But the idea that payday lenders are providing some valuable public service is ludicrous.
Ripley Roach (not verified) on Thu, 04/09/2009 - 09:52
why does everybody look at these small loan companies and pawnshops and other small loan operations as being bad i personally own a pawnshop in texas and everyone has to take into consideration the pawn ticket costs, the liability insurance i have to keep to insure every single item i write a loan on, ect and we take risks everyday i loan out money on items to people who cant or are not able for whatever reason cant get a loan from banks and when they dont come back and redeeme there items then my money is tied up until the item sales and there are numerous incidents where items have sit om my shelves over a year which means all of the profit is gone due to the interest charge because it has sit there so theres a lot more that goes on behind the scene then meets the normal eye so therefore its only right for us to have those interest rates and i wriite a 60 day loan and for those of u who do not know this if a customer picks there item/s up in the first 30 days its actually cheaper than a credit card interest rate and nobody forces people to go pawn there property its strictly totally up to them so if they decide to pawn then they know what there doing we offer a service that helps people feed there families, keep there roof over there head, keep them from getting there cars repo because they cant make there payment so they go pawn there items ect ect i help people who the banks wont and turn them down because the banks dnt care weither they feed there families or keep a roof over there heads and out of the weather ect so were not bad people and no one who loans money for a living can survive with this interest cap so now this s500 bill may take the food off of my families table and take my house ect if i cant make money so this all works out for those who understand it so please stop and think about everyones well being before everyone jumps up and pushes this bill Thanks Ripley
Voice of Reason (not verified) on Thu, 04/09/2009 - 20:19
Looks like all of the "legal loansharks", i.e. Payday Loan Companys and Pawnshops will soon be out of business and I say good riddance, you have prayed on the poor and uneducated long enough!
John Charlton (not verified) on Fri, 04/10/2009 - 07:29
Yes.. by all means.. take away the "Legal Loansharks", as you so put it.. Let's push those UNBANKED and UNDERBANKED people to take up with the ILLEGAL LOANSHARKS... brilliant move!
Look folks, getting rid of Payday Loans and Pawnshops will not remove the NEED for these type of places. People will still run short a few bucks on their utility bills, rent, diapers, food, etc... they STILL HAVE TO BORROW MONEY. Watch out for a rise in gang and mob based loan sharking. And also look for a rise in petty theft, muggings, shoplifting, snatch and grabs, burgluries and breakins.. just to name a few.
How do you propose to help the "poor and uneducated"? What solution do you offer to these folks, as you object to them borrowing $25 bucks against their stereo to buy some diapers for their baby or make sure the electric bill gets paid?
(by the way... you haven't been in a pawshop lately.. If you think pawnshops are only on the seedy side of town to take advantage of the underprivledged... you are the one who is uneducated. More and more middle class working folks are pawning items to make it in this tough economy)
will (not verified) on Mon, 04/13/2009 - 15:42
Take away these small loans and a tremedous percentage of the poulation will default on car notes electric bills gas bills rent payments ect... They we be unable to get the money they need anywhere the banks have turned their backs on them years ago, with the exception of service charges and NSF fees which they are more than happy to collect. Fact is banks are losing money and customers due to these lenders and they are trying run them out of business.
i know many people who have and do take these types of loans out and the large majority of them are happy to have the option. If it were possible to charge the 36% and stay in business than i am sure people would be glad to do it, however it is not possible when your default rate is so high.
I feel the CONCERNED CITIZENS should ban together and start a small loan company of their own charging 36% interest to all customers and make loans to the same clientele the high interest rate companys do. Then consumers will have a low cost option. I will only offer one suggestion in this venture sign a 6 month lease.
Anonymous (not verified) on Wed, 05/20/2009 - 10:36
so lets take the pawn shops and payday loans away!!!!!! boy are you smart! most of you were not alive during the great depression but during that time pawn shops where the ones who where able to help everyone out and make sure they had food on their tables for their families. And shoes on their feet, You must not have ever been effected enough to have to go to one of these places, I hope you thank God everyday that you have been so blessed. But lets remember these people are not forced to go to these places and I for one work in a pawn shop and my customers are very greatful for me and my staff becasue we can and will help them when no one else will. If you are so concerned why dont you donate half of your paycheck to someone in need seeing as how you are wanting to take away their only means of help. Before you go out all half cocked maybe you should go and talk to some of these pawn shop and payday loan customers and let them tell you how much they really are greatful for these places. I think if you where down and you had no money and no food you would have to go somewhere, if you take away the pawn shops where would you go? not everyone has a rich family to run to all the time. And this is not just going to stop helping these people I know several people who do not pawn nor use the payday loans but they can not afford to buy brand new with the high prices, so they come to the pawn shop to get good quality products at half the price they would have to pay. just ask some single mothers who i know that can shop in a pawnshop and still afford to get their children the same toys and games as their friends have and they can then afford to give their children a great christmas or birthday becasue they didn't have to pay the large retail price,.
Neil Jorganson (not verified) on Thu, 06/04/2009 - 09:55
Payday and title loans are used by the ignorant, irresponsible and addicted to string together a necklace or debt that eventually strangles them. This minor restriction is a first step. All fee based loans should be outlawed.
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