Center for Responsible Lending research finds that the payday lending debt trap persists even in states that restrict payday loans while exempting them from interest rate caps.
In "Springing the Debt Trap," CRL finds that high numbers of borrowers are still caught in payday loans for long periods of time, even in states that have passed certain provisions intended to stop this cycle. No measure short of an interest rate cap has effectively addressed the repeat borrowing that advocates, policymakers, and the industry itself agree is the central problem with payday lending.
"Enforcing an interest rate cap in the range of 36 percent is the only measure that has provided relieve for borrowers," said Uriah King, a CRL researcher. "The payday lending industry supports the limited provisions many states have passed because they know these measures will enable the repeat borrowing necessary for their business to survive."
Previous CRL and academic research found, and "Springing the Debt Trap" confirms, 90 percent of payday lending business is generated by borrowers caught in a cycle of repeat transactions.
The measures heralded by the industry as reforms have done nothing to ease this problem, and that includes renewal bans and cooling-off periods in between loans, limits on the number of outstanding loans, or payment plans.
"The good news is that the dozen states, and now the District of Columbia, that do have a double-digit interest rate cap realize substantial savings," said Leslie Parrish, who co-authored the report. "They will save their citizens a combined $1.5 billion per year in predatory fees."
Harvey Morgan, a Republican in the Virginia House of Delegates, sponsored the 2002 bill that opened Virginia to payday lending.
"Payday loans do not help, they make money problems worse," Morgan said today. "I am now committed to ending the interest rate exemption for payday lenders in Virginia. We must put payday loans back under the 36 percent cap applicable to small loans."
William Batchelder, a Republican from the Ohio General Assembly said the 1995 law that legalized 400 percent interest in Ohio was misguided.
"Of course it was a mistake to overturn the usury cap," said Batchelder. "You can't just dismantle a long-standing institution of Western civilization and not expect harsh consequences."
The report finds that 90 percent of payday loans still go to borrowers with five or more loans per year in states without an interest rate cap, even if they have other restrictions on the practice. Over 60 percent of loans go to borrowers with 12 or more transactions per year. Nearly 90 percent of repeat payday loans are made shortly after a previous loan was paid off, confirming the pattern of rapid loan flipping characteristic of the practice.
CRL recommends that states reconsider exemptions from their interest rate caps for payday lenders, or pass a comprehensive small loan law with an interest rate cap at or around 36 percent if there isn't one in place.