Pro & Con: Should Congress pass more laws to regulate payday loans?

Loan centers dot highways and saturate strip malls in many lower-income communities, offering loans to consumers who have fallen on hard times.

Unfortunately, some lenders exploit the financially disadvantaged, reaping as much as $8.6 billion in storefront and online payday loans with an average of 400 percent annual interest rates.

For the typical payday loan customer earning about $20,000 a year, a few hundred dollars offered by these companies is just enough to get their family through a cash crunch.

The catch is, these high-cost loans with triple-digit interest rates rapidly transform short-term credit into long-term debt, and rob working families of whatever financial freedom they might have had.

Unable to break free of the debt trap, borrowers take out a second or third loan to cover high monthly payments. Nationally, 90 percent of payday lending business is generated by borrowers with five or more loans a year, and more than 60 percent by borrowers with at least 12 loans a year.

In a new report released by the Center for Responsible Lending, the organization claims that three-quarters of the payday loan volume is generated by borrowers who, after initially taking out a payday loan, must get another before the next paycheck. In fact, 87 percent of new loans are taken out within two weeks of paying off the first.

As a response to this nationwide, predatory lending practice, Sen. Richard Durbin (D-Ill.) is calling for an end to indefensible triple-digit interest rates on short-term loans. Durbin is the lead sponsor of the Protecting Consumers from Unreasonable Credit Rates Act.

If passed, the bill would give all Georgians the same consumer protections against predatory lenders that Congress previously enacted with bipartisan support in defense of military personnel and their families: a 36 percent interest rate cap on consumer credit.

In opposition to Durbin’s bill is Rep. Luis Gutierrez (D-Ill.), who heads the House Financial Services Subcommittee on Financial Institutions and Consumer Credit. In 2007, Gutierrez was a lead sponsor of the Payday Loan Reform Act, which would have prohibited high-cost loans outright.

Flash forward two years, and Gutierrez is now pushing a loophole-riddled bill that would allow lenders to charge annual interest rates of nearly 400 percent. The representative’s bill would cap biweekly interest rates at 15 cents on every $1 borrowed, or the equivalent to 391 percent per year.

Gutierrez’s change of heart may be ascribed to the fact that the top contributor to his 2008 campaign was payday lender QC Holdings, according to the Center for Responsive Politics. Additionally, the Online Lenders Alliance contributed another $4,600.

As consumers, the choice between 400 or 36 percent interest is clear. Businesses that offer triple-digit interest loans, however, are intentionally deceptive with their slick marketing and lobbying tactics.

As Gutierrez said best, “While they may not be JP Morgan Chase or Bank of America, they’re very powerful. Their influence should not be underestimated.”

Nor should the depth of their pockets.

Beth Malone is the communications coordinator at Georgia Watch, a consumer advocacy group.

NO: Legislation will kill an industry that fills a vital role in the economy.

By Tommy Moore

These are tough economic times and Congress is trying to successfully guide our nation back onto solid economic footing.

However, it is critical that lawmakers on Capitol Hill do not make the mistake of using the financial crisis as an opportunity to eliminate the payday lending industry.

To prevent any confusion, a payday loan is a two-week loan, generally around $300. The fees associated with the loan are about $16 for every $100 borrowed.

Payday loan stores are not title lenders, installment lenders or check cashers.

The effort to kill the payday lending industry is being spearheaded by two top lawmakers in Washington, D.C.

Rep. Luis Gutierrez (D-Ill.) has introduced legislation in the House that would make many payday lending stores across the United States unprofitable by setting a national cap on all payday loans at $15 for every $100 borrowed.

In the Senate, a bill has been introduced by Sen. Richard Durbin (D-Ill.) that would essentially close every payday lending store in the United States.

The senator’s legislation enforces a 36 percent APR for all loans.

This means payday lenders can only charge $1.38 per $100 borrowed over a two-week loan. A fee so low it will put stores out of business.

Backers of Durbin’s legislation insist that the industry is crying wolf and can live with these restrictions.

However, in states that imposed similar lending caps, payday lending stores are about as common as snowstorms are in Miami.

In states where payday lending has been eliminated, bankruptcies and other types of financial hardships have increased, according to research.

Even if payday loans are outlawed, millions of people will still need quick access to cash. For some, a short-term loan means the difference between fixing a car and losing a good-paying job in a recession economy. For others, it means stopping a utility company from turning off their means of cooking, bathing or cooling off.

We also mustn’t forget those who use payday loans to avoid bouncing checks and paying fees assessed by banks, which are often much higher than what payday lenders charge.

There are few alternatives to payday loans.

Some credit unions offer payday loan alternatives, but with unappealing fees or restrictions.

There are unscrupulous overseas lenders who ply their trade online and are not subject to the same laws that protect payday lending customers in the United States.

Also, nationwide only 30 banks have signed up for FDIC’s supposed alternative to payday loans known as the “Small Loan” program.

The reason there are so few alternatives to payday loans is that no one has figured out a more cost-effective method. Some charitable groups offer good alternatives to payday loans, but charities cannot be expected to provide the capital needed nationally to help people make ends meet.

One aspect of the payday lending debate I find very troubling is the assertion that we charge people 600 percent interest rates for the loan.

This is absurd.

The 600 percent interest rate referred to by our critics is an annual rate. Payday loans are taken only for two weeks.

Despite our opposition to being banned by Congress, the payday industry has repeatedly welcomed reasonable regulation.

In fact, our industry has worked with 34 state legislatures to support laws that protect customers and preserve access to small-dollar short-term credit.

But if Gutierrez and Durbin are successful, it won’t prevent people from needing emergency cash or requiring our services.

It will only mean that Americans have one less option for short-term cash loans and that they will be forced to choose more expensive alternatives.

Tommy Moore is with Community Financial Services Association of America, the national trade association representing payday lenders.