Consumer advocates are calling for a ban on all types of payday lending, saying that without regulatory federal laws, millions of borrowers charged triple-digit annual percentage rates (APR) will continue to be trapped in never-ending cycles of debt.
“Payday lenders destroy wealth in the middle class,” said Robert Lawless, co-director of the University of Illinois Program on Law, Behavior and Social Science.
Payday lending provides short-term access to credit, but often comes with high interest rates and expensive fees.
Essentially, a consumer can go to a storefront payday lender, bank or online lender, and leverage a signed check or a bank account (as long as the lender can access funds later) to get money up front. Oftentimes the lender will cash the check on the next payday; or if the loan is extended or “rolled over,” the consumer is charged new fees.
“People are paying interest rates of more than 300 percent, and paying over and over again for the same small amount of money they initially borrowed,” Lawless said. “So money that could have gone toward putting food on the table is instead paying off last month’s payday loan.”
A joint report recently released by the Woodstock Institute refers to payday lending as “among the most harmful forms of credit.” The report calls for “strong federal action to end payday lending.”
Titled "The Case for Banning Payday Lending: Snapshots from Four Key States," the report was commissioned as a collaboration between four consumer advocacy groups across the country: the Illinois-based Woodstock Institute; California-based Reinvestment Coalition; New York-based New Economy Project; and North Carolina-based Reinvestment Partners.
“Notwithstanding extensive documentation of the payday lending debt trap and the billions of dollars payday lenders have systematically stripped from low-income families and communities, especially those of color, the payday lending industry has cannily built and exerted its political power in state capitols throughout the U.S.,” the report reads. “As a result, many states permit usurious payday lending, with often dire consequences for millions of payday loan borrowers already struggling to make ends meet.”
Courtney Eccles, policy director for the Woodstock Institute and co-author of the report, called for the passage of federal legislation that would establish a 36 percent interest rate cap on all consumer credit transactions.
“Payday loans are just not a good way to help people manage their expenses and not a good product, we think there’s a much better way for folks to get safe short-term loans,” said Eccles. “It’s so very easy to get caught up in cycles of debt and get behind.”
Introduced in April by U.S. Sen. Dick Durbin (D-IL), the Protecting Consumers from Unreasonable Credit Rates Act, S 673, would apply a maximum APR of 36 percent to all open-end and closed-end consumer credit transactions, including mortgages, car loans, credit cards, overdraft loans, car title loans, refund anticipation loans, and payday loans. Four co-sponsors have signed on to the bill, which has been referred to the Senate Committee on Banking, Housing and Urban Affairs.
“As we climb out of the worst recession in a generation, many working families continue to struggle. For some, payday lenders offer a quick way to make ends meet, but often with devastating consequences,” Durbin said in a statement. “With interest rates of two and three hundred percent of value of the loan, these excessive rates and hidden fees have crippling effects on those who can afford it least. Capping interest rates and fees for consumers is a fair and sensible thing to do to protect working families during our economic recovery.”
Eccles said a regulatory federal law is particularly important because online lenders and certain banks that fall under a federal charter, such as Wells Fargo, are able to circumvent state laws.
"Even if a state has a strong law, such as New York has a 25 percent interest rate cap, some lenders can still go unregulated," she said. "Something needs to be happening at the national level."
In an effort to curb the most predatory aspects of payday loans, Illinois has passed a series of reform laws. But short-term loans with interest rates of up to 390 percent are still offered in the state.
The Payday Loan Reform Act (PLRA) was enacted in 2005 to set caps on fees and advance amounts while limiting the number of short-term loans a borrower can have at one time. But after lenders found loopholes in the law, such as extending the loan period to sidestep short-term regulations, both PLRA and the Consumer Installment Loan Act (CILA), which applies to loans with a longer lifespan, were reformed in 2010.
Under PLRA, short-term payday loans of between 13 and 45 days cannot exceed $1,000 and include a $15.50 for every $100 loan rate cap, which can lead to APRs as high as 390 percent.
Payday installment loans of between 120 and 180 days, which likewise fall under PLRA, also include a $15.50 for every $100 loan rate cap. According to the Illinois Department of Financial and Professional Regulations (IDFPR), the average lifespan of a payday installment loan was more than 162 days with an average APR of 234 percent.
Under PLRA, a borrower can have up to two loans at a time, as long as the payments are less than 25 percent of the individual’s gross monthly income when it comes to payday loans, and less than 22.5 percent of income for payday installment loans.
Consumer installment loans, which fall under CILA, last longer than six months. Interest rates cannot exceed 99 percent for loans under $4,000 and 36 percent for loans of more than $4,000. The maximum consumer installment loan is $40,000.
No lender can operate under PLRA and CILA simultaneously.
The IDFPR maintains a database of all payday advances, of which all lenders are required to check before a new loan is issued.
"It’s a politically difficult thing to limit and restrict these payday lenders, especially in a state like Illinois where you’ve got a powerful lobbying entity behind the payday industry,” said Eccles. “The political strength of the industry in this state has made it difficult to secure a universal strong interest rate cap.”
There are 509 payday lender storefronts in Illinois, according to the IDFRP.
Lenders gave 153,154 payday loans in 2011, according to a trend report from the agency. In the first nine months of 2012, lenders reported 106,425 loans.
The average monthly gross income for Illinois’ short-term loan consumers from February 2006 through September 2012 was $33,157 per year, the IDFRP reports. Approximately 56 percent of short-term borrowers earn an annual salary of $30,000 or less.
During that same period, each payday loan consumer borrowed an average of 5.2 loans, the report indicates.
“The important thing to know is that Illinois' regulations got rid of some of the worst abuses of the industry,” said Eccles. “But we still have plenty of consumers in Illinois that are taking out short-term, triple-digit interest rate loans.”
Lawless said consumer advocates calling for a ban to payday lending face a “real uphill climb.”
“There’s a need for short-term credit, and if you ban it entirely, then the question is where do people who need short-term credit go,” he asked. “You can’t make money lending at a 36 percent interest rate and the question from the lender’s perspective is, is this a loan that really should be made?”
Lawless said people often use short-term credit as a safety net to pay for the necessities of life.
But, he added, it’s not uncommon to see people in bankruptcy court with a plethora of payday lending on their credit history.
“A national usury rate is definitely worth fighting for,” he said. “In the long run, the most effective approach would be federal law limiting APRs to 36 percent. But we also need more legitimate lenders stepping into the market to provide products that don’t have predatory features associated with payday loans.”