A new report underscores how badly Iowa lawmakers screwed up when they missed the chance in 2010 to enact reasonable regulations on “legalized usury,” more commonly known as payday lending.
The “payday lending trap” is not a new story, but National People’s Action, a coalition of grassroots organizations, released new details today on the industry’s huge costs to consumers. “Profiting from Poverty: How Payday Lenders Strip Wealth from the Working Poor for Record Profits” explains how payday lenders exploit subprime borrowers, charging them annualized interest rates between 390 percent and 550 percent. You can download the whole depressing tale here (pdf). The working poor, who tend to be “unbanked” or “under-banked” and are disproportionately members of ethnic minority groups, are the target customers for payday lending because they may be “cut off from mainstream credit sources.”
While the payday loan industry advertises the product as a sensible choice for a one time emergency financial need, the reality is that the average borrower takes out 9 payday loans per year in quick succession. Only a small fraction of the 17 to 19 million payday loan borrowers take out one loan per year, while a majority of payday loan customers are in effect longer-term borrowers who pay triple-digit interest rates on repeat loans for months at a time.
The Profiting from Poverty report cites data from state regulators indicating that “payday loans cost borrowers no less than $3.4 Billion per year in loan fee payments” (likely a conservative estimate). Regulations limiting annualized interest rates on small-dollar loans to 36 percent would reduce those loan fee payments to about $300 million. In other words,
An estimated $3.1 Billion dollars of wealth is “stripped” every year from payday borrowers to pay high-cost cash advance fees.
The payday lending industry talks about job creation, but think about how many jobs at other businesses could be supported if working poor Americans had $3.1 billion more to spend on other goods and services.
The report concludes,
When a 36% interest rate cap is imposed, as it has been in 17 states and the District of Columbia, the payday lending industry is dramatically altered. The current payday lending business model is dependent on high-cost, high-volume, repeat borrowing. Payday lenders typically cease operations in the state when significant interest rate limits on small loans become the law of the land. This report acknowledges that current payday loan volumes would not continue under a 36% interest rate cap scenario. A real need for small dollar credit exists–although not at the inflated level that current payday loan volumes suggest. As consumer advocates have argued and recent experience in states such as North Carolina have demonstrated, only when the usurious and predatory practices of payday lending are contained can more consumer-friendly small dollar loans alternatives be developed.
Iowa Citizens for Community Improvement highlighted some of the key findings related to Iowa:
* capping payday loan interest rates at 36 percent would save Iowans over $36 million every year. (That’s $36 MILLION that is being stripped away from our local economy!)
* there are 220 payday lenders in Iowa. (There are more payday lending shops than there are McDonald’s in Iowa!)
* nearly half of all licensed payday lenders in Iowa have been financed by big banks. Wells Fargo and Bank of America are the top financiers of payday lending across the country.
Iowa CCI is calling on the Iowa Senate Commerce Committee to pass Senate File 388, which would cap interest rates in Iowa at 36 percent. It’s a good idea; since 2007, seven states (Arizona, Arkansas, Colorado, Montana, New Hampshire, Ohio, and Oregon) passed laws limiting small-dollar annualized loan interest rates to between 17 percent and 45 percent, “effectively ending or severely limiting payday lending.”
Unfortunately, any new payday lending regulations would be dead on arrival in the Republican-controlled Iowa House. House Majority Whip Erik Helland and Ways and Means Committee Chair Tom Sands helped block payday lending reform in 2010. Even if they had a change of heart, getting a new business regulation past Governor Terry Branstad would be an uphill battle.
Iowa Democrats had a golden opportunity to limit payday lending in 2010, when key legislative leaders vowed to pass a reasonable bill restricting interest rates to 36 percent. Governor Chet Culver surely would have signed that bill; he had supported earlier regulations on car-title loans in Iowa. Unfortunately, shameless Democratic State Representative Mike Reasoner helped Sands and Helland keep the payday lending bill bottled up in subcommittee. As a result, it missed the “funnel” deadline for keeping legislation alive. I can’t think of any good reason why House Democratic leaders didn’t find a way to assign the bill to a different committee or add it to other legislation later in the 2010 session. Their failure is now costing thousands of Iowans an estimated $36 million per year that could be spent on other needs, supporting other businesses.
Of all the Iowa Democrats who lost in November 2010, Reasoner was the one I was least sorry to see exit politics.