Survey Shows Consumers Pay Interest Rates Of 300% Or More For Small Loans
Payday
lenders charge consumers interest rates of 300% or more and are
stepping up lobbying efforts to weaken state laws preventing usury,
according to a new report released today by U.S. Public Interest
Research Group and the Consumer Federation of America. The industry is
forming alliances with national banks in attempts to avoid regulation
where it has been unable to enact industry-favorable state laws, the
report finds.
"Consumers
who turn to payday loan operations with names like "Check Into Cash,"
"Dr. Check" and "Checkloan" for quick cash wind up paying interest
rates that would make a loanshark blush," said Ed Mierzwinski, Consumer
Program Director of U.S. PIRG.
In
a typical payday loan, a consumer writes a personal check for $115 to
borrow $100 for two weeks (until payday). The Annual Percentage Rate
(APR) on this loan is 390%. At the end of the two week period, the
consumer often "rolls the loan over," or pays an additional $15 to
carry it for two more weeks, increasing the finance charge on a $100
loan to $30.
"No
matter how desperate the consumer, no lender should be able to gouge
the public with such high-cost loans," said Jean Ann Fox of CFA.
"Payday loans trap consumers on a debt treadmill and expose borrowers
who can’t pay to coercive collection tactics."
The
new report, "Show Me The Money" surveys 230 payday lenders in 19 states
and the District of Columbia. It also analyzes the status of payday
lending legislative activity in these and other states around the
country. Key findings of the report are:
- Nationally,
23 states and the District of Columbia have legalized payday lending by
enacting industry-sponsored legislation that exempts the firms from
usury and other credit laws. An additional 8 states allow payday
lending because they have neither a usury limit nor other small loan
rules. The remaining 19 states prohibit payday lending through a
combination of interest rate ceilings and/or usury laws.
- Payday
lenders are partnering with banks and thrifts to make loans, especially
in states such as Virginia and Texas that prohibit payday lending.
National banks, such as Eagle National Bank and Banco Popular, claim
that they don’t have to comply with most state interest rate ceilings.
Other banks and thrifts making payday loans include County Bank (DE),
Web Bank (a Utah industrial loan company), and Goleta National Bank
(partner with Ace Cash Express).
- Payday
lenders are not just "mom and pop" corner store operations. Many are
part of national chains, although payday loans are being made through
pawn shops, at gas stations, over the Internet, and via faxed
applications. The industry forecasts more than $2 billion in revenues
this year.
- Nationally,
the average APR calculated by PIRG/CFA researchers was 474% for a
two-week loan. Most payday lenders questioned either failed to quote an
APR, denied that an APR applied to the loan, or wrongly quoted the low
two week rate, rather than the correct annual rate.
- Payday
lenders, who claim that their loans are preferable to bouncing checks,
charge consumers bounced check fees averaging over $22 if a payday loan
check is returned for insufficient funds, with bounced check fees as
high as $40 per check.
The
report also summarizes legislative activity in 1999 and examines
ongoing activity that has already begun in a dozen states. The industry
is pushing legislation in Arizona, Colorado, Florida, , Georgia,
Indiana, Maryland, Michigan and Virginia. Bills to tighten restrictions
on payday lenders are pending in California, Illinois, Kentucky and
Wisconsin. State Attorneys General in Maryland and Indiana recently
held that payday lenders are subject to state small loan rate caps.
"Congress
and federal regulators should close the national bank loophole used by
payday lenders," said Fox. "States must be able to enforce their usury
and small loan laws to protect their citizens."
"US
PIRG calls on Congress and state legislatures to protect consumers
against these atrocious predatory lending practices by passing tougher
laws." said Mierzwinski. The groups urged the following national
reforms:
- The
19 states that prohibit payday lending should strictly enforce their
small loan rate cap and usury laws to protect consumers from exorbitant
small loan rates charged by payday lenders.
- The
8 states without usury ceilings or other small loan laws applicable to
payday lending should cap their rates or, at least, adopt the
CFA/National Consumer Law Center model payday loan law.
- The
23 states and the District of Columbia that have already legalized
payday lending should, at a minimum, lower permissible interest rates
and strengthen consumer protections based on the CFA/NCLC model act.
- Congress
should regulate payday lenders by enacting HR 1684 introduced by Rep.
Rush (1st-IL). Congress should stop the national bank regulators from
allowing nationally-chartered banks and thrifts to provide protection
to payday lenders from strong state consumer protection laws by
enacting legislation being drafted by Rep. John LaFalce (29th-NY),
ranking member of the House Banking Committee.. The Senate should
support the Wellstone (MN) high-cost credit amendment to the bankruptcy
bill, S. 625, pending on the Senate floor.
The
groups recommended that consumers avoid payday loans by solving
financial problems without going deeper in debt by, for example, asking
for more time to pay a utility bill. If a loan is unavoidable,
consumers should shop for the lowest cost credit available, comparing
both the dollar finance charge and the Annual Percentage Rate. Cash
advances on credit cards and traditional small loans are less expensive
than a typical payday loan.
"Last
week, the payday lender trade association issued a so-called
"best-practices" platform that isn’t good enough for consumers,"
concluded Fox. "Even if payday lenders complied with all those
proposals, loans would still cost more than 300% interest and trap
borrowers in debt. Consumers need real protection against usury, not
unenforceable public relations ploys."
"It’s
no secret that the payday lenders have grown astronomically by exposing
consumers to second-class legal protections," concluded Mierzwinski,
"It’s time for our elected officials to protect consumers by rejecting
unfair payday lender proposals."
