Lawmakers and consumer advocates are crying foul as legislation seen as an end-run around payday loan restrictions heads for the Senate floor.
Detractors say the “small consumer loan” would have effective interest rates of more than 200 percent. They say the loans would be nothing more than a new kind of payday-style loan, but with even higher limits.
They are also worried that the loans are targeted at reopening a market among military members that has been mostly shut down by federal restrictions.
Sen. Sharon Nelson, D-Maury Island, voted against Senate Bill 5231 when it passed out of committee earlier this month. She said the proposal is being pushed by payday lenders trying to circumvent the state’s 2009 reforms by disguising “predatory loans with exorbitant interest rates” as a new type of installment loan.
Payday lending has been greatly reduced since the 2009 changes took effect. According to the Department of Financial Institutions, in 2009 there were 603 payday lenders in the state that issued loans totaling more than $1.3 billion. By 2011, only 256 lenders remained, issuing loans totaling less than $327 million.
SB 5231, sponsored by Sen. Steve Hobbs, D-Lake Stevens, would allow loans that fall somewhere between short-term payday loans and the more traditional long-term installment loans available at banks and credit unions.
While payday loans available at places like Moneytree and Advance America are capped at $700, the new loans would have terms of six to 18 months and would be capped at $1,500, with a 36 percent annual interest rate.
However, lenders would be allowed to charge a 15 percent origination fee and monthly maintenance fees of $7.50 per $100 loaned. It’s that combination of fees that concerns Marcy Bowers, director of the Statewide Poverty Action Network.
Bowers said her group worked with the Consumer Federation of America, Columbia Legal Services and the Center for Responsible Lending to analyze the cost of a six-month $1,000 loan that met the requirements of the proposed small consumer loan. The effective interest rate of that test loan was 218 percent, she said.
While that’s not as high as the interest rates on payday loans, which can reach 391 percent, Bowers said it’s a far cry from the 36 percent the new loans would be advertised to have.
“There’s just no reason for such a terrible loan,” said Nelson, who sponsored the 2009 reforms that she says are under attack. “Especially since consumers can request their current payday loans be converted to an installment loan.”
Under current law, anyone who takes out a payday loan in Washington and feels they can’t pay the loan back by the due date can have their loan converted to an installment loan with no additional fees – an option payday lenders are required to inform borrowers of. However, according to a 2011 DFI report, only 9.52 percent of payday loans were converted to installment plans.
Moneytree’s founder and CEO, Dennis Bassford, testified in support of the bill at a hearing before the Senate Financial Institutions, Housing & Insurance Committee. He said his company’s customers would prefer installment loans 2-to-1. But, Bassford said, current “statutory framework” doesn’t allow lenders to “profitably offer” $1,000 loans.
Nelson said the proposal would also allow payday lenders to get around the 2007 Department of Defense restrictions on payday loans to service members – restrictions that cut the number of payday loans to service members in Washington state from more than 10,000 in 2007, to fewer than 1,000 in 2011.
The new loans wouldn’t fit the DOD’s definition of a payday loan because they’re installment loans. Also, while the DOD restricts service members’ loans to an annual percentage rate of 36 percent, it doesn’t restrict the fees associated with installment loans.
Hobbs, a former Army captain and current member of the Washington Army National Guard, said he supports the DOD’s restrictions on payday loans. He said that he had seen some of his young enlisted soldiers having problems with a cycle of debt from payday loans, and that was one of the reasons he supported Nelson’s 2009 legislation.
Hobbs also said that he’s tried to get rid of payday lending in the past, but there were no votes to do it.
“I’m trying to take their industry – which has been heavily, pretty much hurt, almost destroyed – and put them in a different direction,” Hobbs said. “My hope is that the whole payday lending will just stop and they can do something else other than that.”
Hobbs said he knows the bill needs some work to reach his goal of a loan product that has a limited interest rate and a payment plan. He said he also wants a database to track the new loans so lawmakers can assess their impact and to verify that borrowers are taking out the maximum of one loan at a time.
“Because I don’t want to create a new monster,” Hobbs said.Jimmy Lovaas: 360-943-7123