In February, anticipating the Consumer Financial Protection Bureau’s new rules restricting the high-interest lending practice known as payday loans, a new bill arrived on the Oklahoma Senate floor that would allow such lenders to issue up to $3,000 in loans, or $2,500 more than the current amount allowed.
Sponsored by Sen. David Holt (R-Oklahoma City), SB 1314 was similar to other bills authored in Michigan, South Dakota and Arizona that would allow companies such as Cash America, Advance America, Cashland, National Quik Cash and others operating in Oklahoma to increase the amounts they could loan to individuals by 600 percent. But after a social media outcry and a series of news stories critical of the bill, Holt backed away from the legislation.
In a series of Twitter posts in February, Holt said:
Any appeal for a less-regulated economy still appeals to me as a free market champion, but I will not be advancing SB 1314 (flex loans).
— Senator David Holt (@davidfholt) February 23, 2016
There is not a public consensus to expand options in this industry, & passage of SB 1314 would be unlikely. I have appreciated the feedback.
— Senator David Holt (@davidfholt) February 23, 2016
Holt said he was approached by industry advocates about authoring the bill. Because of the bill’s looser regulations for the industry and consumers dovetailed with his political philosophy, Holt agreed to carry the legislation.
“I’m generally always supportive of bills that expand the free market,” Holt told NonDoc, “but it became evident pretty quickly that this industry has a lot of vocal opponents and that passage of the bill was unlikely in the Senate, so I withdrew it rather than waste people’s time.”
According to the Pew Charitable Trusts, relaxation of federal banking regulations in the 1980s led many states to authorize the issuance of loans against post-dated checks, prompting a sudden boom in the payday-loan industry in the 1990s.
Because these companies were not required to perform background checks on customers, the payday loans became a financial option for people with bad credit ratings or who otherwise could not obtain loans from traditional financial institutions. Pew reports that 12 million U.S. citizens take out payday loans and pay $7 billion in fees alone every year.
‘Morally reprehensible’
Some objection to this high-interest lending comes from members of the religious community, who have opposed payday loans as usury. On May 14, 2015, several religious organizations came together to form Faith for Just Lending, including the Southern Baptist Convention, the National Association of Evangelicals and the National Baptist Convention.
“This is something our faith has been opposed to for generations,” said Rev. Bob Lawrence, president of the Tulsa Interfaith Alliance. “It is morally reprehensible to further burden those who are not in positions of economic power, and it is contrary to the egalitarian message that is central to the Christian tradition.”
“Clearly, it’s a predatory practice that is preying on lower-income people,” said Jayme Cox, president and chief executive officer for the Oklahoma Center for Community and Justice. “Some of these people work very, very hard — they often work in service positions — and it’s unfair for legislators to allow them to be taken advantage.”
Unfortunately for such borrowers, the structure of payday loans works for the customer only if his or her financial situation dramatically improves over the course of one pay period. According to the Consumer Federation of America, the borrower signs a personal, post-dated check for the amount borrowed as well as the finance charge or provides electronic access to his or her account. The amount is due on the next payday, so the borrower either lets the check be cashed or pays another set of finance charges to roll it over to the next payday.
That seems simple enough, if the borrower is a one-and-done customer and doesn’t roll the loan over for a new set of finance charges. But if the loan is rolled over, the costs begin to mount.
Do the math
The average finance charge for a $100 payday loan is between $15 and $30, or $75 to $150 for $500 — the maximum loan amount in Oklahoma. To put this in terms that credit card users can easily comprehend, let’s say a borrower takes out a $300 cash advance at an ATM based on an average 20.23 percent annual percentage rate. If he or she pays off the advance in one month, the finance charge is $13.99, resulting in a total repayment of $313.99.
To borrow that same amount from a payday loan company, the average customer will incur a $17.50 finance charge per $100, or $52.50 for $300. If they roll it over once after the initial 15 days, the total payback for a one-month loan of $300 is $405. That equals out to an APR of 426 percent. And if the loan is carried out for four months, the borrower pays back a total of $667.50, or more than twice the amount of the original loan.
‘A cycle of debt’
Pew reports that only 14 percent of payday loan borrowers are able to pay off the loan during the standard 15-day period, while most roll it over and incur more finance charges. President Barack Obama discussed the difficulty in getting out from under payday loans in a weekly online address on March 28, 2015.
“While payday loans might seem like easy money, folks often end up trapped in a cycle of debt,” Obama said.
The president created the Consumer Financial Protection Bureau in 2010 in response to the predatory lending practices that resulted in the the 2008-09 recession. The CFPB’s new regulations restricting payday loans, which are expected to be released in May, would require such companies to perform background checks to determine whether the prospective customer can afford to pay back the loan.
Payday industry has cash for lawmakers, too
But the industry is fighting back with help from Republicans and Democrats.
HR 4018, the Consumer Protection and Choice Act, based on a Florida law that is backed by the payday loan industry, was introduced by U.S. Rep. Dennis Ross (R-Fla.), and would push back the new CFPB regulations by two years and allow states to adopt less strenuous rules governing payday loans. The bill’s co-sponsors include U.S. Rep. Debbie Wasserman Schultz (D-Fla.), chairwoman of the Democratic National Committee. According to the Center for Responsive Politics, Schultz has received $63,000 from the payday-loan industry in campaign contributions.
In a Dec. 15 letter to Congress, the Consumer Federation of America strongly encouraged lawmakers to vote down HR 4018, citing that the law “would allow abusive small-dollar lenders to go on doing business as usual if states enact laws similar to a Florida law, putting in place so-called ‘industry best practices.’” In addition, MoveOn.org started a petition on March 1 calling for Schultz to “Oppose the Consumer Protection and Choice Act or Resign.”
Pennies from heaven?
Whether the CFPB or HR 4018 wins out, there are organizations that want to provide a different avenue for people needing short-term loans — a choice that does not involve high interest and continually renewable debt.
“We understand that the economy is still not strong,” said Ray Hickman, executive director of Tulsa Metropolitan Ministry, an organization working to promote interfaith cooperation. “We understand that people don’t have many options if their credit is bad, and that is why we are working toward a project that would enable Tulsa Metropolitan Ministry to be a loan source in the community through social lending.”
Hickman said he hopes to present details about Tulsa Metropolitan Ministry’s proposal later this year.
