Payday Loan Reform Act Must Be Strengthened

Statement by Michael Calhoun, President, Center for Responsible Lending


Center for Responsible Lending
April 2, 2009

"Today the House Financial Institutions and Consumer Credit Subcommittee will hold a hearing on H.R. 1214, the Payday Loan Reform Act.

We commend Representative Luis Gutierrez (D-IL), who chairs this Subcommittee and introduced the bill, for his long history of working for economic fairness and financial reform and his interest in addressing payday lending, a practice that frustrates the efforts of low-income families to recover from a cash shortfall and get back on firm financial ground.

We continue to oppose the provisions of HR 1214 because they do not address the fundamental problems with payday lending that trap borrowers in debt: the high cost of the short-term credit and the requirement that the borrower pay back the loan with a single paycheck. Instead, HR 1214 lets payday lenders continue to charge annual interest rates of 391 percent for a typical payday loan, and includes measures that have proven to be ineffective in numerous states in stopping the debt trap caused by the terms of payday loans.

The payday lending industry has favored similar bills in states that have taken on payday lending reform because their bottom line—the ability to trap borrowers in high-cost debt over long periods of time—has not been affected.

For example, states have tried to stop abusive repeat payday loans by banning loan renewals like the loan renewal ban in H.R. 1214 (e.g. Florida, Oklahoma). Payday lenders, though, evade this restriction by closing out the loan and simply re-opening it with a new identical loan, with no resulting reduction in the average number of loans per borrower or interest paid.

States have also tried payment plans like that proposed in H.R. 1214 (e.g. Florida, Illinois, Michigan), and these have not produced any meaningful reduction in the number of trapped borrowers. And the proposed requirement that borrowers have only one loan at a time has no effect on the fundamental payday lending abuse of trapping borrowers into revolving 400 percent interest loans over long periods of time. The average payday borrower pays back about $800 for a $300 loan, with $500 going purely to interest.

In many states, payday lenders have evaded attempted reforms by only slightly changing their product to have it exempted from legislation similar to H.R. 1214.  For example, in Virginia, payday lenders have marketed open-end loans to avoid new regulations and in Illinois and New Mexico, payday lenders changed their product to high-cost installment loans so that they are not subject to their respective state laws targeted at the industry. With minor product changes, none of the protections in H.R. 1214 would apply and payday lenders could charge unlimited interest, exceeding even the 391 percent annual interest for the typical payday loan allowed by its provisions.

A federal law addressing the practice of payday lending must include measures that will be effective in eliminating abusive payday loan flipping, such as a 36 percent rate cap on annual interest—a common-sense way to restore protections that have been severely compromised in the consumer credit market.

We support efforts by lawmakers and regulators that encourage responsible lending and emergency savings that would help families become more financially secure. While many neighborhoods are truly in dire need of resources that build wealth, payday loan stores do the opposite and make the problem worse, stripping wealth through interest on loans that are designed to be difficult to pay off."

For more information: Kathleen Day at (202) 349-1871 or kathleen.day@responsiblelending.org; or Carol Hammerstein at (919) 313-8518 or carol.hammerstein@responsiblelending.org or Charlene Crowell at (919) 313-8523 or charlene.crowell@responsiblelending.org.

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About the Center for Responsible Lending

The Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation's largest community development financial institutions.