Tuesday, February 10, 2009

‘Payday loans’ are back under the House microscope

The often-contentious, always-thorny issues surrounding “payday loans” are back under intense scrutiny in the Legislature. Again this year, the first stop on the payday-loan tour is the House Financial Institutions & Insurance Committee. A package of legislative proposals was heard in the committee this morning.

Regulated by the Department of Financial Institutions, these loans are unsecured, short-term transactions offered to consumers by a check-cashing business.

Here’s how the loans generally work: The borrower writes the lender a post-dated check, and then the lender provides a lesser amount of cash to the consumer – minus interest and fees. Following this initial transaction, the lender holds the check for a specified time period, during which the consumer can either redeem the check by paying the face amount to the lender or allowing the lender to cash the check after the loan period has expired.

Today’s public committee hearing took testimony from private citizens and payday-lending industry representatives. The agenda included:

● HB 1310, which restricts harassing communications on the part of check cashers and sellers who are attempting to collect delinquent small loans.
● HB 1425, which prohibits these small loans altogether.
● HB 1684, which limits the balances of all outstanding payday loans to 30 percent of the gross monthly income of a borrower.
● HB 1685, which adds an additional 60-day payment-plan option for small loans.
● HB 1709, which requires a minimum repayment term of 60 days, reduces fees for small loans to 10 percent of the principal, and sets up a new installment plan for borrowers.
● HB 1805, which limits fees on small loans when a payday lender has loaned a borrower an aggregate of $700 in the previous 30 days.
● HB 1806, which limits the amount of small loans to an aggregate of $700.
● HB 1807, which prohibits small-loan rollovers, which in turn are defined as loans made within 24 hours after the repayment of a previous small loan made by the licensee to the borrower.
● HB 1851, which requires that potential borrowers be told about alternatives to a small loan.

In the committee testimony on the issue today, viewpoints were no less divided than public comments taken in last year’s legislative session.

Some folks speaking against payday lending, on the one hand, want to see these small loans totally banned. Citizens speaking up for regulations note that current law allows lenders to require payments prior to a payday, which unfortunately often creates the need for yet another loan. The interest charged on the loans greatly exceeds the state usury rate, according to others. Regulation-supporters maintain that payday lenders target minority communities and military families. When the industry was legalized, additional backers point out, it was thought that payday lending would be a product used only occasionally.

On the other hand, business representatives and some private citizens supporting the industry say that while payday lending should be regulated, it would be a big mistake to eliminate the loans as an option. They emphasize that people should have this choice. If people have more options, according to these folks, they can make better decisions. They say that while it’s true payday borrowers pay for the convenience of these loans, this practice doesn’t invariably lead to the same type of debt as the use of credit cards. Since it must be paid off on the due date, observed one payday-lending supporter last year, this type of loan instills financial discipline.

You can see some of the early reports on the hearings here and here.