Payday loans should be regulated
Kim N. Price, Guest Columnist
The House Banking and Insurance Committee will hold a public hearing today on payday loans at the Statehouse. It might be one of the more interesting committee hearings in this legislative session because the payday loan industry that is being attacked is actually not opposed to the opposition's position.
Alabama Watch, who is a consumer watchdog in the state, is strongly opposed to the bill and will be testifying.
The group thinks that payday loans, also called check deferment loans, should fall under the Small Loan Act.
What's ironic is that most of the people in the business of payday loans think so as well.
The payday loan companies argue that they serve a useful purpose in today's tough economic times because banks cannot and do not loan money under $1,000. Payday loan companies say their average loan is between $200 and $300. Most people borrow the money from paycheck to paycheck, which is how the industry got its name. People repay on payday.
But even the payday loan industry argues they should be regulated like all small loan businesses are now regulated under the Small Loan Act.
What makes payday loans different is that amounts loaned are even smaller than loans that fall under the Small Loan Act.
Alabama Watch believes consumers are being ripped off with high interest rates of 400 percent and greater, but the industry argues that most people will pay 1 percent per day over a 30-day period. It would cost a borrower $20 to borrow a $100 for a 14-day period.
The bigger issue to the payday loan companies is the lack of security in making these loans. Basically, there is none, they argue. The only requirement someone has to have is that they have a job.
Losses are extremely high in the business. When you loan someone $500 and the only thing you have to have for security is a job, there are going to be high loan losses.
Most of the people who use payday loan companies have nowhere else to go, which they point to as a service to poorer people. Banks will not loan to them due to the amount they want to borrow.
Alabama Watch and other watchdog groups argue that because the payday lenders charge high interest rates, it is a drain on poor people. The payday loan companies believe the higher interest rates are a trade off to the number of bad loans they absorb.
Alabama and Georgia are the only states not regulated and most believe there should be some enforcement against outrageous high interest rates.
The high interest rates charged by payday loan companies stimulated a lawsuit by the Alabama State Banking Department several years ago claiming the interest charged was above the rate stipulated in the Alabama Small Loan Act.
A Montgomery County Circuit judge agreed to an interim policy while he made his decision, and it was generally believed that there would be clarifying legislation making his decision a bit easier. But legislation failed last year, mostly because Sen. Lowell Baron, who opposed the legislation, is president Pro Tempore of the state Senate, and in the payday loan business.
Last year, the judge ruled that the Small Loan Act does not regulate payday loans and now there is no regulation at all. The bill before the Alabama
Legislature looks a lot like last year's bill that the State Banking Department supported and allows for high interest rates and consumer fees.
It does not put payday lenders under the act, nor does it restrict interest rates.
It seems to us if the industry that is caught up in the controversy does not oppose going under the Small Loan Act, the Legislature should amend the bill to make that happen. That would satisfy the watchdog groups and the lenders.
It does not prevent those companies from charging the higher interest rates, which a judge has said does not fall under the act. If the risk is higher, then the interest rates should be allowed, within reason.
Most of the talk about 400 percent rates only applies after someone has not paid back their loan for a year or more.
A poor person who cannot afford such a loan should avoid these companies if they cannot pay back the loan. Even a bank would charge a higher rate to a consumer who is a credit risk. It just makes sense.
Kim N. Price is publisher of The Outlook. The Outlook and the Enquirer are owned by Boone Newspapers. He can be reached at 256-234-4281, ext. 27. His e-mail address is email@example.com.