Democrats, please get payday lending reform right

Key Democratic lawmakers will push for new limits on payday lending during the Iowa legislature’s upcoming session, which starts on January 12. State Senator Joe Bolkcom, who chairs the Senate Ways and Means Committee, called for restricting the “loan shark rates” the industry typically charges. The Iowa Catholic Conference also supports limiting the interest rate for payday loans to 36 percent. That’s welcome news. Although 36 percent interest is still quite high, it’s a lot better than the 300 to 400 percent interest rates payday lenders are in effect currently charging customers.

In 2007, the Iowa legislature had smaller Democratic majorities yet managed to pass a bill capping interest rates on car-title loans at 21 percent. (Former Governor Tom Vilsack and Attorney General Tom Miller had advocated that reform for a long time, but Republican leaders refused to allow a vote in the Iowa House when they controlled the chamber.)

In theory, it shouldn’t be hard for House Democrats to find 51 votes out of their 56-member caucus to pass payday lending reform. However, at yesterday’s press conference with Senator Bolkcom, State Representative Janet Petersen expressed doubt that an interest rate cap could pass the House Commerce Committee, which she chairs.

I hope we’re not in for another round of a few Iowa House Democrats blocking legislation that would serve the public interest. More thoughts on this issue are after the jump.

Payday lending reform is needed because the industry’s business model depends on trapping borrowers in cycles of debt.

As [the Center for Responsible Lending] points out, however, lenders generate volume and profit by requiring loans to be paid in full by the next payday and charging nearly $60 in fees for the average $350 loan. These terms essentially guarantee that “low-income customers will experience a shortfall before their next paycheck and need to come right back in the store to take a new loan.”

In fact, the Center for Responsible Lending finds that 76 percent of payday loans are made because of “churning,” or when a borrower needs to take out a new payday loan every pay period to cover their expenses and the amount they owe on their previous loan.

The current recession has increased the number of Iowans struggling to make ends meet, and likely the number of payday loan victims. But look how people representing the industry pretend they have the little guy’s interests at heart:

Jim Carney, an Iowa-based lobbyist for the payday loan industry, says [the interest rate] limit put the car title loan industry out of business in Iowa and a similar limit would ensure payday loan businesses would close as well.

“You take away payday, you take away car title lending – there is no other alternative source of lending,” Carney says.  “Where do these folks go who have legitimate emergencies?”

Carney says payday loan firms are not banks or savings and loans and their business model cannot be successful with a 36 percent limit on interest rates.  Carney cites reports from the Iowa Superintendent of Banking which found fewer than 20 complaints were filed by customers of payday loan companies in Iowa over a six year period in which about $4.6 million in payday loan transactions were made in the state.

Well, I wouldn’t expect many people trapped in debt to have the time or the resources to file official complaints. Also, it’s good news that the car-title loan industry isn’t active here anymore; those loans were not exactly valuable services for people in need. And isn’t it touching that Carney’s is so concerned about people with “legitimate emergencies” that he wants them to be forced to pay 300 or 400 percent interest over several debt cycles?

I credit Senator Bolkcom and State Representative Petersen for making payday lending reform a priority. But as I mentioned above, Petersen doesn’t think she has the votes on her committee for interest-rate caps.

The Iowa House Commerce Committee has 13 Democrats and 10 Republicans. So two Democrats could block a reform bill by voting with the committee Republicans, who I assume will stand with corporate interests against consumers.

Petersen didn’t specify who on her committee lacks the “political willpower” to support payday loan interest rate caps. The obvious suspects are Brian Quirk and Doris Kelley. They are in the “six-pack” of House Democrats who blocked prevailing wage and other labor bills last year. There may be others on the committee hesitant to cap payday loan interest rates as well.

Our options for pressuring uncooperative House Democrats are limited. I haven’t heard much lately about Democratic primary challengers for state legislators, and Iowa Democratic leaders have (unwisely in my opinion) vowed to defend all statehouse incumbents no matter how much they obstruct the majority’s legislative agenda.

I know Iowa Citizens for Community Improvement plans to organize on the payday lending issue. If they and the Iowa Catholic Conference can mobilize a lot of constituents to contact representatives serving on the House Commerce Committee, as well as other “six-pack” members, we might have a chance to get the interest rate caps through.

Alternatively, Petersen suggested limiting the number of payday loans that can be made to one customer. I don’t know whether that approach would face any less opposition from the industry, since trapped customers taking out loan after loan provide most of the business for payday lenders. I also don’t think it would be a great political message for Democrats to say we cracked down on payday lending if consumers can still be hit with sky-high interest on five (or ten, or whatever) loan cycles.

Any thoughts on the substance or politics of payday lending reform are welcome in this thread.  

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