Activists, legislators take on payday, title loans that “push people into poverty.”
State Rep. Patricia Todd knew something was wrong when a woman who was a tenant in AIDS Alabama’s housing quit paying rent. Todd, who supervises that program, finally got the tenant to tell her what had happened.
The woman’s car had broken down, and the repair bill was $300. Not having the money, she took out a payday loan. Todd said the woman explained that she then could not repay the loan and interest without renewing the loan – and a cycle began. By the time Todd talked to her, the debt had grown.
“She ended up with five [payday loans] to the tune of $2,500 for a $300 loan,” Todd, (D-Birmingham), said. With Todd’s advice, the tenant managed to work her way out of debt, including not repaying two online loans from companies that were not licensed to do business in Alabama.
That experience resulted in Todd working to regulate payday loans, which now have compound interest of up to 456 percent a year. A bill she has introduced in the Alabama Legislature in 2013 and again this year would limit the loans to 36 percent interest. A bill filed by State Rep. Roderick Scott, (D-Fairfield), would do the same with title loans, which now have interest as high as 300 percent.
Last week, State Sen. Scott Beason, (R-Gardendale), introduced a bill that would limit both payday and title loans to 30 percent annual interest.
Todd’s bill was before the House Financial Services Committee two weeks ago and was sent to a subcommittee, making it difficult for it to emerge and be voted on.
Scott’s bill was carried over at the call of the chairman, and Scott hopes it will come back before the committee soon.
Payday loans are short-term loans that are accessible to people who have jobs and checking accounts with no credit check. Typically, borrowers promise to repay the loans on their next payday and are charged 17.5 percent interest for that period, which generally is two weeks to 30 days. Borrowers give lenders checks dated for their payday.
Thus, a $300 loan like the AIDS Alabama tenant received carries $52.50 in interest. A $500 loan, the highest allowed by Alabama law, costs $587.50 to repay.
Many payday lenders require borrowers to return on payday with cash to cover the loan and interest. They are given their checks back at that point. If the borrower does not come, the lender cashes the check. Some lenders simply cash the checks on the borrowers’ payday instead of asking borrowers to pay in cash.
Todd says it is common for borrowers to immediately borrow again, setting themselves up for another round of high interest and beginning a cycle of growing debt. She said borrowers typically do not read the contracts they are required to sign for payday loans, partly because the type is tiny. “They say ‘Just give me the money,’” she said.
Todd said payday loans have little regulation in Alabama. State law does say that borrowers are limited to $500 in loans at one time. The problem, she said, is there is no common database for lenders to check, making it possible for borrowers to obtain numerous loans. Her bill would require a common database.
“We regulate every other financial transaction,” Todd said. “They need to be regulated like everything else.” She said other loans are regulated to protect the public and “to me, this is no different.”
Buck Wilson, president of the Modern Financial Services Association, which represents payday and title lenders, said, “We are against those pieces of legislation. It would be virtually impossible to operate under those restrictions.”
He argued that the 2003 law allowing payday loans is balanced. “It protects the interest of consumers as well of lenders,” he said.
Wilson said requiring use of a common database would “create an undue hardship for the consumer. … The information that is in a database is only as good as what is put in.” He said it would be possible for a borrower to apply for a loan only to be told that the database showed an existing loan, even though that loan had been repaid.
Wilson said Florida had an honor system for borrowers before it instituted a common database 10 years ago. When the database was established, it showed that only 16 percent of borrowers had more than one payday loan, he said.
“What’s the point?” he asked. If more than 80 percent of borrowers already comply with the limit on loans, the common database is not necessary, he said.
Wilson said other lenders, such as banks, credit unions and finance companies, would not be bound by the same laws as payday lenders if either the Todd or Beason bill becomes law.
He said short-term lenders do not target the poor. “We deal with people who are gainfully employed…middle-class Americans.”
Wilson said short-term loans are “used as an advantage strategically by consumers” to avoid bank fees and other charges they incur otherwise. He said consumers in states like Georgia and North Carolina, which have banned payday loans, consumers fare worse than they would if they could get payday loans.
Wilson, an Athens resident whose company operates 18 payday and title loan stores in Alabama and Tennessee, said companies like his often work with borrowers who run into difficulties. If a borrower informs and employee of difficulty, the store will hold the predated check and work with the borrower.
“It doesn’t benefit us or them to create additional [bank] fees for them,” he said.
A number of groups and agencies, including the Southern Poverty Law Center, are working together to push for regulations on payday and title loans. “We had been getting many reports of people who are getting caught in a cycle of debt due to payday and title loans,” said Southern Poverty Law Center attorney Sara Zampierin. The center held listening sessions in the summer of 2012 and published a report on the situation in Alabama.
Southern Poverty Law Center representatives are involved in the efforts to pass restrictive legislation. They have testified at legislative hearings and participate in rallies sponsored by Alabama Arise and the Alliance for Responsible Lending in Alabama.
Alabama Arise, a nonprofit concerned with issues affecting Alabama’s poor, has a legislative day scheduled for 9 a.m., March 6 in the Alabama Capitol auditorium in Montgomery.
Stephen Stetson, Alabama Arise policy analyst, said his organization got involved several years ago when representatives began to hear “terrible horror stories about both payday and title loans.” The group pushed for reform in 2007, but nothing passed that year. Short-term loans have been on the group’s agenda since then.
The Alliance for Responsible Lending was formed last year when other groups joined the fight against payday and title loans. Todd introduced a bill then as well, but the bill did not make it through.
“We haven’t given up,” said Joan Witherspoon-Norris, director of social services for the YWCA of Central Alabama. “We’ve got to fix this systemic problem that is pushing people into poverty. … People who are in desperate circumstances get one loan and go across the street and get another.”
She added, “The end result is bankruptcy.”
Vestavia Hills attorney Ginger Hamilton agreed that payday and title loans are a factor in bankruptcy. “I have not done a single Chapter 7 [bankruptcy] with less than three payday loans,” she said. Clients tell her “they go there because they have no other choices. Their credit cards are maxed. No bank will loan to them, and they have used their friends until they can’t.”
Witherspoon-Norris said short-term lenders make it easy for consumers who are looking for help. She added, “Because they are legal, it gives them some legitimacy.”
Beason is harsh in his criticism of payday and title loans. “I believe usury is wrong,” he said. “I don’t know where interest ends and usury begins. I just know we’re way past it at 300 percent.”
He said his bill would limit interest to 30 percent because that is higher than the highest interest charged by credit card companies. He believes his bill would regulate payday and title loans “consistent with what we do in other financial sectors.”
Because the legislature is halfway through its 2014 session, Beason is not sure what chance his bill has to pass. “Maybe the public can help us get it passed,” he said.
“Usury should be prohibited,” said Roderick Scott. “If people genuinely understood it, it never would have been like this.”
Scott decided to focus on title loans because of the devastating effect that they can have on borrowers whose cars are repossessed. “They end up without any form of transportation, which creates other problems,” he said.
Mary Page Wilson-Lyons, program director for the Women’s Fund of Greater Birmingham, agreed that the public could help. She said polls have shown that 72 percent of Alabamians want payday and title loan reform. Her organization is attempting to get the word out.
“Once you see the numbers, you know how egregious it is,” she said. “What we keep telling lawmakers is…what a great thing to do during an election year.”
LaShon Menefee, organizer for Birmingham Faith in Action, said proponents of regulations are making strides toward achieving a groundswell of public opinion and pressure. “We’ve had a lot of interest,” she said. “Once we awaken others, it will be more of a swell.”