People, especially poor people, in need of quick cash often turn to payday lenders.
It’s a choice that can come at a steep cost.
The average annual interest rate for payday loans in Missouri is about 455 percent, or about $53 in interest and fees for a $300 two-week loan.
Critics paint the industry as predatory, trapping the poor in endless cycles of debt. For more than a decade, they’ve tried to enact tougher regulations. Each time they’ve run into fierce opposition that ultimately doomed their efforts.
A few Missouri lawmakers think they’ve finally found changes that can pass, but their ideas are being panned by the payday loan industry’s loudest critics as half measures posing as reform.
The Missouri Senate on Thursday passed legislation aimed at addressing long-held concerns with payday lending. The biggest change: a prohibition on borrowers repeatedly renewing loans without fully repaying them, a situation that can result in interest and fees quickly piling up.
“This is a huge change,” said Sen. Mike Cunningham, a Springfield-area Republican who sponsored the measure. “What I’ve heard for years is the problem is rollover loans and how they continue the cycle of debt. This does away with that issue.”
But consumer advocates say the proposal does little or nothing to improve what they call some of the nation’s most lenient payday lending laws. In fact, they contend, it could make things worse.
“It’s a series of cosmetic changes that comes under the guise of reform,” said John Miller, a Kansas City attorney and volunteer with Communities Creating Opportunity. “All this bill will do is allow payday lenders to say we’ve accomplished reform without actually doing anything to address the debt trap.”
Missouri’s laws governing payday lending have created fertile soil for the industry.
Payday loans typically give the consumer a loan with a yet-to-arrive paycheck as collateral. Generally, they range from $100 to $500. The borrower can pay such a loan off when it comes due in a few weeks or agree to additional fees to extend the due date another two weeks.
It’s that tendency to fall into a cycle of increasingly hard-to-make payments, inevitable penalties and triple-digit interest rates that draws so much criticism.
State law allows borrowers to renew a loan six times and caps interest and fees on a loan at 75 percent of the original principal.
The average annual interest rate of payday loans in Missouri was 454 percent from 2011 to 2012, according toa report by the state’s finance division
. That’s more than 100 percentage points higher than the national average, according to a recent survey by the Consumer Financial Protection Bureau.
The number of lenders in Missouri has fallen in recent years but still far outpaces nearly all Missouri’s neighbors. There were 984 payday loan licenses issued in Missouri in 2012, compared to only 272 in Kansas, 209 in Iowa and 349 in Oklahoma.
In fact, Missouri is second only to Tennessee among its neighbors in the number of licensed payday lenders.
Several states have tried banning payday loan renewals, said Diane Standaert, legislative counsel for the Center for Responsible Lending. In each case, they’ve had little impact.
“Rollover bans don’t stop the debt trap,” she said. “They don’t stop the pattern of getting a new loan every two weeks, and they don’t stop the fees from piling up.”
According to aCenter for Responsible Lending report
, lenders are able to circumvent renewal bans in other states by having borrowers pay off their loan and immediately take out another. Because those transactions technically involve paying off the loan — if only for a moment — they are not considered renewals.
Real reform, Standaert said, would be capping the interest rates lenders are allowed to charge.
A coalition of groups attempted to do just that in 2012 by placing a measure on the Missouri statewide ballot to cap interest rates for short-term loans at 36 percent. That effort fizzled, however, under the weight of $2.8 million worth ofspending by opponents funded by the industry
that ultimately tied the measure up in court and led proponents to abandon their efforts.
Randy Scherr, executive director of the trade association United Payday Lenders of Missouri, said looking at annual percentage rates on payday loans is misleading because the loans are not issued on an annual basis. And ultimately, fees applied to small, short-term loans used to pay for emergency needs are still much smaller than bank overdraft fees or late bill payment penalties.
Additionally, Scherr said, the risk associated with these types of loans for the lender means there are few options other than payday loan stores for those facing an emergency.
“People in financial straits who need a little extra cash to fix their car or pay a bill need these types of short-term loans,” Scherr said. “We’re providing a loan where these people have no place else to go for those emergencies. It’s not predatory lending. We’re not overcharging. They are needed.”
Sen. John Lamping, a St. Louis County Republican who joined eight Democrats and four other Republicans who voted against the measure, said the state’s law would be improved under the legislation.
But not by much.
“What’s going to happen in practice is the borrower is just going to go to a second, third, fourth and fifth different place and have that many loans outstanding,” he said. “What it’s really done is slowed down the process, which is a really, really small step.”
It’s not government’s job to protect people from making bad decisions, Cunningham said. But he points out his bill creates an extended time period to pay back a loan with no additional interest or fees.
Cunningham served as chairman of the House Financial Institutions Committee in 2010 when a proposed interest rate cap was working its way through the legislative process. When that bill died, Cunningham caught flak because the vice chairman of his committee owned a payday lending store, something critics argued was a clear conflict of interest.
“It’s been a frustrating thing trying to get something done,” he said.
Miller, the Kansas City attorney, said advocates for an interest rate cap have not ruled out trying to place the issue on the ballot this fall. He noted that Congress in 2006 prohibited payday lenders from charging higher than 36 percent interest for military families.
“There’s no reason,” he said, “that the same cap we give to those who serve our country shouldn’t apply to those who are struggling to get by in minimum wage jobs.”