Legislator targets payday lenders
December 11, 2006 - Wichita, Kansas
A Wichita legislator wants to place a cap on the interest charged by payday and car title loan stores -- an annual rate that is currently as high as 390 percent a year.
Rep. Melody McCray-Miller, D-Wichita, and a grassroots community group hope Kansas can follow in North Carolina's footsteps.
That state used to have about 1,000 companies that made short-term loans to consumers before it began enforcing a cap on interest rates.
Now it has none.
Although Sunflower Community Action says its goal is not to drive all payday lenders out of Kansas, it does seek tighter restrictions.
"Whatever they're doing in North Carolina should be what's done everywhere," said J.J. Selmon, community organizer for the northeast chapter of the group.
Selmon and other leaders from Sunflower recently returned from a meeting in Washington, D.C., where officials from several states talked about how they are regulating the industry.
Supporters of the industry say payday loans are a good alternative for people who can't borrow money elsewhere. They say the industry fills a need not met by traditional financial institutions, which typically do not make small-dollar loans.
A 36 percent interest rate cap similar to that in North Carolina would force payday loan stores to close, said Whitney Damron, a lobbyist for the Kansas Payday Loan Association.
The industry says that groups that are critical of payday loans are trying to take choice away from consumers.
Damron challenged Sunflower Community Action to find a way to provide short-term loans to consumers.
How it works
Payday loans work this way: A lender gives the consumer cash -- up to $500 in Kansas -- and agrees to hold on to a personal check to repay the loan until the customer's next payday.
The fee for the service is typically $15 for every $100.
But some customers find themselves borrowing from one payday loan establishment to pay back another. Sunflower and Consumer Credit Counseling Service, a nonprofit group in Wichita and Salina, have heard of customers with as many as 18 loans.
"It's a huge, huge problem all over the country," Selmon said.
Rep. Melody McCray-Miller, D-Wichita, plans to introduce a bill during the next legislative session that she hopes will tighten protections for consumers who use the loans as an easy source of cash for emergencies and other needs.
Her bill also will address car title loans, which are made on the value of a customer's car or truck.
Miller hopes a cap on the amount of money consumers can borrow and a cap on the annual percentage rate charged will make loaning money based on a personal check less lucrative for the industry.
What North Carolina did
North Carolina's interest rate cap was 36 percent, said Susan Lupton, senior policy associate with the Center for Responsible Lending, which is based in that state.
In 1997, representatives from the industry went to the general assembly and sold the concept of payday loans. The general assembly allowed payday loans to go above the 36 percent cap during a four-year period from 1997 to 2001.
"That's when the 1,000 shops came in," Lupton said. "The general assembly thought it would be an occasional product offered by check cashers."
When the sunset deadline expired in 2001, payday loan companies couldn't make money with the 36 percent interest rate cap.
Some companies started disguising payday loans as rebates, Lupton said. If a consumer rented an hour of time on the Internet, for example, they would get a $500 "rebate." The rebates really were payday loans, Lupton said.
"Nobody wanted the services they were offering," she said. "They wanted the loan."
Some companies started "renting" an out-of-state bank's charter so that they could say North Carolina's laws didn't apply to them.
The state clamped down on that, too.
Soon, the 400 companies left in North Carolina left the state, she said.
"The payday lending business model is incredibly inefficient," Lupton said. "They have to flip borrowers repeatedly to make any money. If held to a cap, it's just not going to be a profitable environment for them."
Setting a limit
Miller is not yet ready to say what the exact monetary limits will be in the bill she hopes to introduce.
"We are looking at doing two things," she said. "One, we're going to work on tightening up the actual statute that speaks to payday lending. We'll amend that. And we'll look at capping the amount that an individual can receive. I am still in the process of evaluating how effective a 36 percent rate cap on what I would call all predatory lending would be."
Kevin Glendening, deputy bank commissioner for the state, said he definitely supports a rate cap on car title loans because that is a secured loan.
"On payday loans, I'm not necessarily unsupportive of it" but those are unsecured loans, he said.
Glendening noted that Congress passed a bill authorizing a 36 percent cap on payday loans made to military members.
"Obviously the question is, if the federal government believes that these higher rates create a problem for their folks, why doesn't that carry over to the rest" of the population, Glendening said.
Currently, Kansas law says that consumers can't have more than two outstanding payday loans with a lender or more than three in a 30-day period.
Rolling over a loan is illegal. But consumers can pay off a loan and get another one on the same visit.
To help enforce the law, Miller wants a database in place that would track how many loans a consumer had.
Damron said the government shouldn't get involved in making credit decisions for consumers. He said the government wouldn't tell consumers how many credit cards or mortgages they can have.
Miller thinks her bill would have support.
"There are several of us who are very concerned about what's going on with payday lending and what we call predatory lending," she said.
Damron said the industry will fight tighter restrictions.
Sen. Don Betts, D-Wichita, said he supports an interest rate cap.
"People borrow $200, $300 and $500, and end up paying three times that amount back," he said. "Will they ever get out of debt?"
PLIWatch Editor's Note
In conjunction with its news article, The Wichita Eagle ran an Internet poll beginning December 11, 2006. By the morning of December 17, 1,374 people had voted. The question was: "Should Kansas more tightly regulate the payday and car-title loan industry in the state?" Voting Yes: 188 people (14%). Voting No: 1,180 (86%). Voting Undecided: 6 people (0%).
In the associated forum, reader stsman posted: "Damn, and I thought only 53% (the number of arena supporters) were that dumb..With this mentality is there any hope????????????" In response, reader BW1 posted: "Welcome to the 'arena' of public opinion. It's called democracy. Isn't it great?"
The Wichita Eagle, Deb Gruver, Staff Writer
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- Interview with JJ Selmon, Community Organizer - LoanMax Protest [June 24, 2006] -
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