Payday loans are nothing if not a bad deal for borrowers who can least afford the brutal interest rates they require — a markup amounting to an annualized percentage rate (APR) of 459 percent.
This instrument of lending was legalized in 1999, and is ripe for the kind of reform proposed last week to state lawmakers.
Hawaii isn’t alone with this kind of problem, and there are other states with an APR that high. But this is a state with an exceedingly high cost of living, making the issue that much more urgent. A borrower pushed to this extreme can face a mountain of bills that quickly climbs higher.
A measure to address this issue, Senate Bill 286, made it through the Senate this past session but was deferred after being heard in the House Consumer Protection and Commerce Committee. The bill sought to adapt a 36 percent APR cap imposed on payday loans for active-duty military, and proposed other regulatory reforms; it should be resurrected for consideration this session.
The bill drew negative feedback last session from various representatives of the industry. One critique came from Lester Firstenberger of Dollar Financial Group, operators of Money Mart stores here.
“Not only would a 36 percent rate cap prohibit us from operating profitably, it would put payday lenders out of business completely in this state,” he added.
Payday lending carries risk for the loan business, of course. However, the opponents will need to make a persuasive case why 36 percent is unsustainable, when applied to all lending and not just military clientele.
Stephen Levins, executive director of the state Office of Consumer Protection, favored the lowered rate and endorsed the idea of other changes that could rein in the business for the benefit of consumers.
These are deserving of discussion. Some were proposed at the informational briefing by Nick Bourke, consumer finance director for the Pew Charitable Trusts. These include rules aimed at making payments more affordable; loan costs spread out more evenly over the term; and barring prepayment penalties.
There are reasons usury laws exist in the first place: They’re to protect borrowers from excessively high rates on loans, so they are not mired in a debt trap.
It’s a national crisis. According to the Consumer Financial Protection Bureau (CFPB), more than 19 million households are caught up in payday loans. Nearly 70 percent of them have to take out a second loan to cover the first, and one-fifth end up saddled with 10 or more loans.
The bureau has come under fire from the GOP leadership in Congress, as an element of financial reforms enacted under the Obama administration. However, in October the CFPB finalized a rule requiring lenders to determine a borrower’s ability to repay their loans up front. This is aimed at avoiding the debt trap from the start.
Given the state of the bureau and opposition by the Trump administration, it’s difficult to see that this protection will be enforced anytime soon.
Bourke told the lawmakers that payday loans hit those who are most at-risk financially. Low income (about $30,000 annually, on average) is one cause of the problem, often compounded by past troubles that left borrowers with a sub-standard credit score. And this makes conventional loans unavailable, he added.
These people use money to cover essential bills such as rent, utilities and car payments, all crucial expenses. So they take out new loans to cover the old ones, ending up in a downward cycle toward insolvency.
Payday loans are not covered by usury laws; regardless, it should be plainly obvious that some form of protection is needed for the consumers who resort to this kind of “help.”
