Congress Moving Toward National Cap On Payday Loans

High-interest loans trap low-income consumers in 'spiral of debt'

March 31, 2009

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The payday loan industry has been fairly successful in turning back attempts on the state level to impose tight restrictions on payday loans. But some members of Congress are pushing legislation that would impose a nationwide limit on what these businesses can charge.

Such a cap has been introduced in both the U.S. Senate and House as one strategy for helping to restore the health of the U.S. economy and financial systems. Senator Dick Durbin, (D-IL) introduced S500 in late February and Representative Jackie Speier (D-CA) followed suit in the House last week, introducing H.R. 1608.

The measures are strongly backed by industry critics, who have long complained that these short-term loans trap low-income consumers in a downward spiral of debt. One of these critics, the Center for Responsible Lending (CRL), commissioned a poll that it says shows wide spread support for capping loan rates at 36 percent. According to the poll, 72 percent of those questioned favor the cap.

“A 36 percent cap on annual interest for consumer credit is a quick, common-sense way to restore protections that have been severely compromised in the consumer credit market,” said CRL president Michael Calhoun. “It would cost taxpayers nothing and plug a $5 billion hole in the wallets of working families. ”

Congress passed a 36 percent cap in 2006 to protect active members of the military after the Pentagon testified that payday loans were affecting military readiness.

Ohio, Arkansas, New Hampshire, and Arizona are among states that recently revoked exemptions from usury caps their lawmakers had given payday lenders.

The industry defends itself by arguing that it serves a group of borrowers who don't have access to bank loans or credit cards. Generally, their customers have little or no established credit. Their loans are secured by an advance dated check, to be cashed after their next payday – hence the term “payday” loans.

However, fees charged on these typically short-term loans can amount to 400 percent or greater on an annual percentage rate basis. Capping the rate at 36 percent would make the payday loan industry much less profitable.

The federal measure would give all consumers an equal measure of protection from what critics like CRL describe as legal loan-sharking, and also would allow state lawmakers to set even stronger protections if they deemed it necessary.

Arkansas limits interest to 17 percent within its state constitution, New York makes interest above 25 percent a criminal offense, and Ohio passed a 28 percent cap last year, which was affirmed by voters in a ballot measure in November.

A federal cap would not alter these state protections.

CRL and other critics contend the terms of these small payday loans keep borrowers paying high interest payments over long periods of time without paying off the loan or even paying down the principal.

“Recent research links predatory products like payday lending to bankruptcy, closed bank accounts, credit card delinquency and a long list of other financial hardships, ” Calhoun said. “There is really no excuse for failing to stop these abuses now, for the sake of working families across the nation, and for the sake of our economic stability. We see where lax consumer protections led us in the mortgage market. We should learn from that hard-taught lesson.”

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