Payday loans will be a hot topic for the coming week at the Louisiana Legislature. The industry has offices all over the place, sometimes three at the same location. Obviously, there is a demand for their services, but at what cost?
Those are short-term, highinterest loans that are based on the borrower’s next paycheck. A person can get a quick $100 loan to help pay his bills by writing a postdated check, including the interest, that the loan office agrees not to cash until payday. The interest on that $100 varies, but it has been reported that a typical loan of that amount costs $30 in interest, which is more than 780 percent annually.
Industry spokesmen deny the rates are that high. Troy McCullen, the owner of 31 pay day loan locations in Louisiana, said state law prohibits much of what the companies are alleged to be doing.
Two bills that will be heard at the Legislature should help clear the air, but their sponsors insist the industry definitely needs tougher regulations. Most of the citizens who take out pay day loans are already in desperate financial situations and don’t need to get deeper in debt.
A number of organizations are pushing for tighter controls. They include AARP Louisiana, the Louisiana Budget Project, Habitat for Humanity, Catholic bishops, ministers and community organizers and United Way of Southeast Louisiana. They make up the Louisiana Coalition for Responsible Lending.
Together Baton Rouge, another member, said Louisiana families paid over $196 million in fees and interest on pay day loans in 2011 and 57,000 households take out loans each year.
Senate Bill 84 by Sen. Ben Nevers, D-Bogalusa, is scheduled for a Tuesday hearing before the Senate Commerce Committee. A similar measure (House Bill 239) has been filed by Rep. Ted James, D-Baton Rouge. They want to cap the annual interest rate at 36 percent.
The Louisiana House Democratic Caucus said the state has one of the highest concentrations of pay day loan storefronts in the nation, with more than four of them for every McDonald’s. Jan Moller, executive director of the Budget Project, told The Advocate there are some 1,000 storefront pay day lenders operating in Louisiana.
James said, “State law allows pay day lenders to get away with charging customers interest rates of more than 300 percent, compared to 24 percent for credit cards. These outrageous interest rates trap many hard-working people into long-term debt.”
When those who borrow don’t repay the loans, they really get into deep debt. The Budget Project said on average, borrowers recycle loans nine times, which translates to paying $270 in fees on a $100 loan. They pay fees to renew their loans and then renew them again and again, or take out more pay day loans.
The proposed legislation would prohibit lenders from rolling over the loans and improve the way loans are handled.
The last serious effort the Legislature made to tighten controls on pay day loans came in 1999. Foster Campbell, a current member of the Louisiana Public Service Commission and former state senator, wanted to limit the annual interest rate to 72 percent. He said the prime interest rate at the time was 7.75 percent.
“If you can’t make it on nine times the prime, I feel sorry for you,” Campbell said at the time.
State Rep. John Travis, D-Jackson, had a House bill in 1999 that set the annual loan rate at 180 percent, which was 16.75 percent for the two- to fourweek life of the loans. He said it was deceiving to compare interest rates because the loans are short-term transactions. His bill passed unanimously and he was opposed to the 6 percent rate that was approved by the Senate.
“Anybody who votes to kill this bill (with the 16.75 percent) wants things to continue as they are,” Travis told House members. He won out in the end.
The Associated Press in 2000 said before the change pushed by Travis it was routine for borrowers to pay $45 in fees to get $201 for 14 days, which translates to an annual percentage rate of 583.7 percent. Under the Travis bill, a lender could charge up to $40.44 on the same loans, or an annual rate of 523.1 percent, not much of a change.
Fees are another problem. There was an effort to curb them in 1999, but legislators took action in 2010 that allowed increased fees.
Some who take out pay day loans don’t want the government to get more involved. And the industry said tougher regulations will drive their customers to loan sharks. However, some critics of the loans believe the pay day companies are loan sharks themselves.
LaPolitics Weekly reported last week the pay day loan bills are the most “lobbied up” measures at the legislative session so far. It said at least 40 lobbyists representing the companies met for a strategy session. So, you know we are talking big bucks here.
Most legislators in office in 1999 supported the bills by Campbell and Travis, because they made some improvements in the pay day loan business. However, Travis wouldn’t agree to any major changes. We will soon find out how serious legislators are this time around about reforming a loan system that takes unfair advantage of people who are already down on their luck.