Barron touts reform of payday loan industry
September 14, 2006 - Huntsville, Alabama
State Sen. Lowell Barron, once a major owner of payday loan outlets, says he just got out of the business and is now planning legislation to regulate it.
Barron, D-Fyffe, outlined his reform plans this week in a meeting with Times editors and reporters. He was accompanied by media and political consultant Steve Raby, who is working in Barron's re-election campaign.
Barron wants to ban so-called "rollover" loans that can quickly rack up hefty interest charges. His bills would also prohibit payday lenders from operating within five miles of a military base and outlaw the seizure of personal property on bad loans made by quick cash outlets.
Another bill would put car title loan businesses under the Small Loan Act, which Barron said would limit interest charges to 24 to 36 percent. Barron plans to introduce the bills when the 2007 legislative session begins in March.
Barron's opponent in the November election, Republican Don Stout of Fort Payne, suspects the reform push is driven more by Barron's re-election hopes than a desire to clean up an industry Barron profited from.
"That's like closing the barn door after the mule is out," Stout said Wednesday. "He's been in this business for years. I just wonder if he plans to give any of these people their money back."
Stout said recent political polls in their state Senate district, which encompasses DeKalb and Jackson counties and part of Madison County, have shown broad public disfavor with the payday loan industry. He did not reveal the source of the polls.
A 2005 financial disclosure form filed by Barron with the Alabama Ethics Commission in April listed financial ties to numerous payday loan businesses.
They include Fast Cash outlets in Arab, Clanton, Tuscaloosa, Piedmont, Centre, Woodstock, Hazel Green, Boaz, Bridgeport, Albertville, Ider, Geraldine, Rainsville, Fort Payne, Gardendale, Scottsboro, Skyline and Section.
Barron also listed an affiliation with an S. Cash business in Fort Payne, an Americash LLC (unlisted town), and a Check and Cash (unlisted town).
He also reported income from interest and directors fees from Rainsville Finance Inc.
Barron told Times editors and reporters he sold his interest in the businesses several months ago. Neither he nor his family have any ties to the payday lending industry, he said.
Officials with Alabama Arise, an advocacy group for the poor, said while they would prefer banning payday loan operations like Georgia has done, they welcome reforms that would protect consumers from getting gouged.
"The one thing that concerns us is the very fact that regulating the industry gives sanction to the practice and that, once in place, it makes it a whole lot harder to outlaw outright," said Jim Carnes, publications director for Arise.
Carnes and Arise Executive Director Kimble Forrister were surprised to learn Barron plans to lead the reform effort.
"That's very interesting information," Carnes said. Forrister said previous legislative crackdowns failed while Barron was the top Senate leader.
In 2003, the House passed a compromise bill agreed to by payday lenders and lobbying groups for the poor and elderly.
But Barron, then Senate president pro tem, helped muscle in a substitute bill that was more favorable to the payday loan industry, they said.
Carnes said the substitute made policing rollover loans more difficult by watering down a central database requirement that would have kept tabs on all loans.
Barron said his rollover protection provision would prohibit lending companies from extending loans. It would further create a payday loan database to be maintained by the Alabama Banking Department in much the same way pharmacists keep tabs of prescriptions.
A central registry would help lenders comply with a provision barring loans to any customer who has received a payday loan in Alabama in the past 60 days.
"Payday loans were never intended to be primary loans. It should be emergency only," Barron said.
The payday loan industry has come under fire in recent years for lending practices critics say prey on the poor and people with spontaneous spending impulses.
Defenders call the loans a poor man's lifeline for many of life's surprises: an emergency medical expense, a car repair, a sudden jump in the cost of a prescription or utility bill.
Payday loan lenders sued the state in 1998 after the state Banking Department issued cease and desist orders to scores of cash advance stores because they did not follow a Small Loan Act limiting interest charges.
The industry won an injunction, and a court-approved consent decree between the parties capped interest rates at 20 percent on a two-week advance. The 2003 reform reduced the interest ceiling to 17.5 percent for a two-week loan of no more than $500, but did little else to regulate the industry.
Barron says his years in the business convinced him of a need for stronger laws to protect consumers.
Media attention on payday loan operators and a recent St. Clair County court ruling declaring excessive pawn shop interest rates unconstitutional also illustrates a need for reform, he said.
Barron said people with no collateral, poor credit or an emergency need for quick cash may have no other way to get the money but through a payday loan place.
He likened payday loans to hiring a taxi.
"You pay a rate to go across town occasionally," he said, "but you wouldn't pay that taxi for a trip across the country."
He said problems arise when borrowers get trapped in a cycle of debt by constantly turning to payday lenders.
Barron said the biggest trap is the practice of "rolling over" a short term loan. Currently, payday lenders can charge $17.50 for a loan of up to $100 for two weeks. So, if a desperate person borrows $200, $35 would be due in two weeks on the interest alone. A borrower who is still short on cash can continue to "roll" the loan over for $35 each two-week cycle. Perpetual rollovers can quickly rack up interest charges that exceed the principal.
Barron said the payday lending industry faces greater risk of default, so some degree of higher interest rates is defensible. Banks lose, on average, 2 percent of their personal short-term loans, finance companies 10 percent, and payday loan operations as much as 30 percent, he said.
Barron said another prong of his reform package would prevent lenders from garnishing military salary or wages.
Stout said he supports a tough reform of the payday loan industry as long the new regulations are enforceable.
"I think they just prey on the poor," he said of payday and title loan lenders.
Carnes of Alabama Arise wants to see details of Barron's payday loan bills.
"Just the fact that Senator Barron may bring some fresh approach to this raises the possibility this issue might be opened for wider discussion," Carnes said. He said he hopes the debate will lead to "creative ways to meet the financing needs of low income people or people who are in dire straits and easily victimized" by predatory lenders.
The Huntsville Times, John Peck, Staff Writer
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- Congressman Davis touts his payday loan proposal [September 20, 2006]
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