As a longtime bankruptcy attorney, Jerry Harper said he has seen the devastation that payday loans can do.
Among his clients’ portfolio of debt are these small, short-term loans. His clients heading for bankruptcy have taken out loans of $500 at a time and are carrying up to a half-dozen loans at once.
“From the day (payday loans) started, they have been a problem. Someone with a bunch of payday loans is someone who files for bankruptcy,” said Harper, who has practiced law for almost 35 years and is now semi-retired.
In the past decade, as the number of payday loans has grown, everyone from churches to the military have called for the need to limit what they consider predatory lending practices.
This time, regulations could come from the federal government. Creating a federal agency to regulate payday lenders is among the many reforms under consideration in the financial overhaul bill that Congress was hashing out last week.
Credit, debit card changes
Owners of debt and credit cards may have noticed receiving more fine-print letters in the mailbox over the past few months. Those card notices can largely be attributed to changes stemming from new federal regulations on the credit card industry. Many of those changes will kick in this summer. If you own a card, here’s what you need to know.
On July 1 for new cards and Aug. 22 for existing cards, banks will decline debit card transactions if there aren’t enough funds available in a checking account. Debit card owners have to opt-in to participate in overdraft protection coverage and agree to the overdraft protection fees.
A creditor can only raise interest rates after the account has been open for more than a year or if the account has been past due for more than 60 days. The creditor must provide a 45-day written notice before raising rates. As for billing, a creditor must mail a balance notice at least 21 days prior to the due date. And an electronic payment must be processed on the same day it is received.
Beginning in August, all gift cards will be required to have at least a five-year life span, according to Housing and Credit Counseling Inc. And for at least one year, gift cards can’t have declining values or hidden fees.
What regulations the agency would enforce is still unclear.
The good, the bad, the ugly
When talking about the potential for federal regulations on payday loans, Tom Linafelt, who is the communications director for QC Holdings, utters a familiar line.
“Main Street shouldn’t have to pay for the sins of Wall Street,” he said.
In this case, Main Street is represented by the more than 500 Quick Cash branches the Overland Park-based QC Holdings has throughout the country. One of those Quick Cash branches is in Lawrence.
In the industry’s defense, payday lenders offer credit to underserved markets, Linafelt said. And the loans are cheaper than overdraft fees, bounced checks or late fees on credit cards, he said.
To get a payday loan, consumers usually only need proof of employment and a banking account. They write the lender a postdated check for the amount due and the additional lending fee. They then walk out the door with the cash. The intent is for the borrower to be back after their next payday with the amount they borrowed, plus the fee.
At the very top of the lending agreement in bold black letters, the lenders spell out the finance charge, annual percentage rate and when the loan is due.
“The vast majority of our customers pay loans on time and appreciate having access to short-term credit that otherwise wouldn’t be there,” Linafelt said.
The Center for Responsible Leading paints a far different and more predatory picture. Week after week — sometimes for months — borrowers will pay the interest fee to avoid defaulting on a loan. On average, a borrower pays $800 to borrow $325. A 2003 study found that borrowers with five or more loans a year account for 91 percent of payday lenders’ business.
“They make money on getting a group of people sucked into a treadmill where they are paying a fee over and over again for the same loan,” said Kathleen Day, spokesperson for Center for Responsible Lending.
Seventeen states and the District of Columbia have passed anti-predatory lending laws that curb or ban payday lending practices.
In Kansas, some regulations are in place. Lenders can’t tack on fees higher than $15 for every $100 borrowed (an annual percentage rate, or APR, of 391 percent) or loan more than $500 at once. Lenders can’t give borrowers more than two loans at once and no more than three during a 30-day period.
Once the loan matures, if the borrower can’t repay it, payday lenders can’t charge more than 3 percent per month, which is a 36 percent APR, until the loan is repaid.
But borrowers get caught in an expensive payday loan cycle when after the end of the two-week lending period, they can’t repay the loan. Lenders can offer to extend the $100 loan for an additional $15 fees. Over an eight-week period, the borrower would end up paying more in fees than what the original loan is worth.
This expensive lending cycle is known as a rollover. In Kansas, rollovers are against the law. But detecting rollovers is difficult, said Kevin Glendening, administrator for the Kansas Uniform Consumer Credit Code, which is the group of laws regulating all consumer financing and lending.
“Let me just say there are ways to attempt to structure those transactions to evade detection,” he said. “We do come across it occasionally and take action against the lender. But it can be difficult to detect because of the nature of the business and because they are cash transactions.”
During the 2007 legislative session, Wichita-based community groups lobbied to toughen up payday lender laws, asking for a 36 percent APR, which would mean that lenders would have to drop their lending fees from $15 to $1.38 for $100 borrowed on a two-week loan. That law never passed.
Regulation vs. competition
Setting caps on just how much interest can be charged on payday loans might not be in the best interest of the consumer. That’s according to a study by Kansas University professor Robert DeYoung.
DeYoung, the Capitol Federal professor in financial markets and institutions, was out of the country and unable to comment for this story. But his colleague, Ronnie Phillips, a retired economics professor from Colorado State University who partnered with DeYoung on the study, explained the findings.
DeYoung and Phillips pulled records on more than 35,000 payday loans in Colorado from 2001 to 2006. The study found that after Colorado imposed a cap on finance charges, competition among payday lenders diminished and prices drifted upward to the maximum amount lenders could ask for under the state’s law.
“If the state and Congress sets a ceiling on fees, what they are doing is telling everyone to charge the maximum,” Phillips said. “It saves (the payday lenders) the trouble of colluding.”
That isn’t to say Phillips believes payday lenders should operate in a totally free market either.
“On one hand, you need some regulation, you need some oversight. But you also need some ways to promote competition,” Phillips sad
Research shows that consumers are aware of the high interest rates attached to payday loans, and the customers are not at the lowest social economic scale. All of them had a job and checking account, which is required before a payday loan is issued. Most had some education.
“It’s just not the totally uneducated and ignorant people that are using this,” Phillips said. “The average person is a woman in her 20s making over $30,000 a year. That is not the poverty level.”
What would help, Phillips said, is having banks curtail overdraft fees so consumers won’t rush to payday loans to cover expenses when money runs short.
Having a federal agency overseeing the payday lending industry would be good for consumers, said Day of Center for Responsible Lending. The nonprofit research and policy group is lobbying Congress to make sure that agency has jurisdiction over all lenders.
Linafelt of QC Holdings believes the exact opposite will happen, with oversight from a federal agency ultimately hurting consumers.
“States are better suited to control the small-loan industry. They know communities better than the federal government,” he said. “They should focus on the Wall Street practices that caused the economic collapse, not on the $300 consumer loan.”