Thursday, May 08, 2008
Congress of Racial Equality (CORE) national spokesman Niger Innis yesterday told the Ohio Senate Financial & Financial Institutions Committee that its payday lending regulations are likely to backfire and hurt the very families the legislators seek to help.
For months the Ohio legislature has been grappling with how to regulate the payday lending industry. Back in February, two different House bills would have effectively terminated the industry, by creating a cap on loan interest rates.
Innis supported a third bill (HB 337) because it would have created an education fund to support adult financial literacy education programs, required check-cashing loan businesses to comply with the ?Fair Debt Collection Practices Act,? and created an optional extended payment plan for borrowers who are unable to pay their loan on their due dates.
All three bills are now dead. Like two of the previous House bills, the current Senate legislation (HB545) would put a 28% annual percentage rate cap on interest charged on a payday loan.
The cap will effectively shut the industry down, affecting jobs and a needed service, Innis contends. ?It is a harmful solution in search of a problem, because it misconstrues the very nature of this business.?
A typical $100 payday loan costs $15. In many cases it is a one-time fee; in others interest continues to accrue until the loan is paid off, just as on credit cards. However, regulators insist on calling it ?interest? and multiplying the 15% interest by 26 (weeks) to get an outrageous 390% Annual Percentage Rate (APR).
Such fees would clearly be obscene for a six-year $30,000 car loan, Innis agrees. But for a $100 two-week loan, a 28% cap translates into barely a 1% surcharge: $1 per loan or 7 cents a day. That amount won't cover the disbursement and collection costs for a two-week $100 loan, or even keep the lights on, he points out. It means well-intentioned legislators will effectively eliminate a much-needed choice for cash-strapped consumers.
What options are they left with? They?re not loans, but bouncing checks and paying bills late are frequently used options. And because regulators have ruled that bounced-check charges and late fees are not ?interest,? these fees are exempt from legislative APR caps. However, if calculated as interest (like the $15 cost of a payday loan), bounced-check fees can easily generate APRs in excess of 2,700 percent, and late fees can easily exceed an APR of 600 percent.
?I?d personally call that obscene ? and disastrous for consumers,? said Innis.
?Many Ohio legislators represent communities that are underserved by traditional lenders. Many of them recognize the dire need for the very services this industry provides. Many believe in reasonable regulation, just as I do ? but not regulations that take this choice away from their constituents,? Innis told Attorney General Marc Dann, during a public hearing in Columbus on April 9, 2008.
Yesterday Innis told Senators, ?It is unfortunate that the people of Ohio are in danger of losing the choice of a viable financial tool.? When Georgia, North Carolina and other states took similar action, they hurt consumers.
As a recent Federal Reserve Bank of NY staff report points out, since payday loans were effectively banned in North Carolina in 2004 and Georgia in 2005, bounced check fees, complaints against other debt collectors and even personal bankruptcies have increased dramatically. https://www.newyorkfed.org/research/staff_reports/sr309.html
?Members of my organization in Georgia have noted that illegal and dangerous loan shark activity is booming. Instead of facing high interest rates, borrowers face broken kneecaps. Instead of helping consumers, these de facto payday lending bans have given vivid meaning and context to the proverb, the road to hell is paved with good intentions,? Innis continued.
?It seems bitterly ironic,? Innis concluded, ?that legislators are threatening to deprive Ohio citizens of this viable financial tool ? at the same time the legislature is working to expand gambling. It is morally troubling and inconsistent to suggest that a single mom seeking a $200 payday loan to buy food and gas should be prevented from doing so, while the same mom should be helped and encouraged to gamble that same $200 on Keno or blackjack.?
CORE is a long time supporter of financial literacy. We believe that people should be able to make their own financial decisions and that they are best able to do that when they are educated and given accurate information. It is for these reasons, that in 2005 CORE initiated its Financial Literacy Choice and Awareness Campaign (FLCA) to educate the public about various financial choices as well as the opportunities and pitfalls associated with those choices.
Congress of Racial Equality -- CORE
New York, NY