Here’s an interesting post from the Sargent Shriver National Center on Poverty Law:

By Karen Harris, Supervising Attorney

In recent years several states have enacted annual percentage interest rate (APR) limits that eliminate the triple-digit interest rates charged by payday lenders. The payday lending industry is now fighting back by sponsoring ballot initiatives that threaten these sensible payday lending regulations in two states: Arizona and Ohio.

A “no” vote on Proposition 200 in Arizona will ensure that payday lenders’ current predatory practices will no longer be permitted when the exemption for such lenders from the state’s 36 percent APR cap expires in 2010. In Ohio, by contrast, a “yes” vote on Ballot Issue 5 will create a 28 percent APR cap on payday loans, while a “no” vote will allow payday lenders to continue charging up to 391 percent interest rates. Thus Arizona voters should vote “no,” and Ohio voters should vote “yes,” on these critical ballot measures to protect their communities from the debt traps caused by abusive payday loans.

Interest Rate Limits and the Debt Trap

People usually obtain payday loans by using their anticipated paychecks as collateral. The payday lender, for a fee, gives the borrower cash and promises not to cash the check until the borrower’s next payday. Since most borrowers cannot afford to pay off the loan rapidly, they continuously renew the loan, accruing additional fees with each renewal and resulting in a triple-digit APR on the loan. A 2007 report by the Center for Responsible Lending found that 90 percent of the payday lending business was generated by borrowers who had become trapped with five or more loans or renewals per year. As a result, payday lending costs American families $4.2 billion annually in excessive fees.

The payday lending industry contends that interest rate limits in Arizona and Ohio will unfairly restrict access to short-term credit for low-income individuals. This argument, however, is not consistent with data from states that have already regulated payday loans. For example, a UNC Community Capital report on North Carolina’s payday lending ban found that “more than twice as many former payday borrowers reported that the absence of payday lending has had a positive, rather than negative, effect on their household.”

Although some states have eschewed rate caps in favor of alternative forms of regulation, the Center for Responsible Lending concludes that “the only meaningful way to address the debt trap is through a comprehensive small loan law with an interest rate cap.” In fact, 12 states and the District of Columbia have already saved their citizens more than $1.4 billion by capping small loans at or around 36 percent. Ohio and Arizona can follow their example, but only if voters in those states take appropriate action on November 4.

Payday Loan Reform in Illinois

In 2005 Illinois capped payday loans at 36 percent through the Illinois Payday Loan Reform Act. However, this law did not protect consumers whose loans were for 120 days or more. Payday lenders simply extended their loan terms to 120 days or more in order to resemble consumer installment loans and be exempt from the law. The Shriver Center is working with the Monsignor John Egan Campaign for Payday Loan Reform to close this loophole and propose consumer protection amendments to the Consumer Installment Loan Act.

Tags: payday loans, predatory lending