Editorial: Payday loan rules make sense
Kansas legislators should take steps to rein in the predatory lending practices some in the payday lending industry employ.
On Wednesday, a special legislative committee discussed a bill that would cap interest rates on commercial loans in Kansas at 36 percent per year and allow lenders to charge additional fees of up to $20 a month or 5 percent of the loan amount, whichever is less. Ultimately, committee members declined to provide a recommendation, saying they wanted to first study the impact of new federal regulations on the payday lending industry.
On Oct. 5, the Consumer Finance Protection Bureau released new federal guidelines for payday lenders. But the new federal guidelines are significantly limited — they apply only to short-term loans of 45 days or less or longer-term loans that have balloon payments at the end.
According to the state bank commissioner, payday loans in Kansas totaled more than $300 million in 2016. Interest rates and fees average an astounding 391 percent per year.
Companies that make payday and auto title loans are regulated in Kansas by the Uniform Commercial Credit Code. Under UCCC rules, payday loans are limited to $500 on loans that last seven to 30 days, and lenders cannot charge more than 15 percent of the amount borrowed. However, they can charge an additional 3 percent per month for loans that go past their maturity date. Lenders cannot make more than two loans to the same person at any one time, and they cannot make more than three loans to the same person within a 30-day period.
Payday loans got their name because they theoretically are designed to be a stopgap to help individuals and families make it until their next payday. But a majority of the customer base for payday loans are low-income residents in financial crisis who have difficulty paying off the loans in the time frame. They often get caught in a vicious cycle of taking out multiple loans and incurring significant fees and interest payments.
Officials from Catholic Charities of Kansas told lawmakers Wednesday that they work with families who received loans they weren’t qualified for and that they were incapable of paying back on their current incomes.
Not surprisingly, the payday lending industry is opposed to caps on interest and fees, and has lobbied against new regulations. But the restrictions being discussed still provide lenders with the ability to charge significant interest rates on payday loans.
Payday lending needs further guidelines to protect Kansas families from being taken advantage of when they are at their most vulnerable. Caps on interest rates and fees are not unreasonable and the Legislature should take steps to implement such caps in 2018.