Lending the poor a helping hand
September 7, 2006 - Birmingham, Alabama
A loan is a loan is a loan?
There are regular loans governed by Alabama's Small Loan Act, which caps interest rates, depending on the amount borrowed, at either 24 or 36 percent a year.
There are payday loans governed by the "Deferred Presentment Services Act," which, with fees of up to 17.5 percent of the loan, can lead to interest rates of as high as 400 percent a year for a two-week loan. (By the way, don't look for a payday loan in the Yellow Pages under "D," for deferred. Try "L," for loan.)
And then there are title loans governed by the Alabama Pawn Shop Act, which allows companies to charge up to 25 percent a month, for a 300 percent annual percentage rate.
How can this be? How can companies prey on poor people desperate to borrow money and charge them exorbitant interest rates? Because the Alabama Legislature -- which, not incidentally, includes payday loan company owners among its members -- allows it to be.
On Aug. 25, a St. Clair County circuit judge ruled that part of the state's Pawn Shop Act may be unconstitutional, which could force major changes in the way title companies charge such high interest rates to borrowers who pawn their vehicle titles.
Judge Charles Robinson Sr. ruled the act violates equal protection rights by allowing title loan companies to charge as much as 300 percent interest.
Witness the sad, infuriating case of James Waites, who sued Express Enterprise Inc. in early 2000 after paying $900 in interest on a $400 title loan. Waites took out the loan, agreeing to pay 25 percent interest a month, to buy medicine for his wife. All $900 Waites paid went only to interest he owed on the loan. When Waites quit paying, his truck was repossessed.
Why should Waites, or anybody, have to pay 300 percent interest on any type of loan?
Enterprise said it plans to appeal, and appellate courts may reach a different conclusion. The Legislature shouldn't wait. It quickly needs to undertake drastic reform of the laws allowing these loan sharks -- payday and title lenders -- to charge the interest rates they do.
The Legislature has pretended to fix this problem before. In 2003, the House passed a compromise bill agreed to by payday lenders and advocates for the poor and elderly. But Senate President Pro Tem Lowell Barron, who owned payday lending businesses, sabotaged things with a substitute bill more favorable to payday lenders, which the Legislature passed. The new law provided few protections for borrowers; in fact, its main purpose was to make this unethical practice legal.
Next year, lawmakers must bring real reform to payday and title loans. Preying on the poor may be a lucrative business, but it's not one the Legislature should condone.
The Birmingham News, Editorial
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