Few legislative proposals can be cast in such black and white terms as efforts that would have payday lenders subject to the same usury regulations as other lenders.
Those pushing for reform accuse payday lenders of “preying” on those who are in a financial bind and “sucking” the life out of communities. Those in the business refute the claims and say the loans provide a useful service at a reduced cost, as compared to incurring overdraft fees.
According to Warwick Senator William Walaska, legislation that would virtually kill the payday lending industry is not likely to pass and if any changes are made, they will probably be in payday loan regulations.
On Tuesday, members of the Senate Commerce Committee heard both arguments as they considered legislation introduced by Senator Juan Pichardo (D-Providence). If passed, payday lenders could charge no more than a 36 percent APR. Similar legislation has been introduced in the House by Warwick Rep. Frank Ferri.
Presently, the Department of Business Regulation regulates payday lenders.
The maximum they can loan is $450.
Payday lenders charge $10 per $100 loaned for a two-week period. That rate works out to a 260 APR if the loan were renewed every two weeks for a full year. But that doesn’t happen, Jamie Fulmer, senior vice president of Advance America told the committee.
Fulmer said that borrowers write out a check for the amount borrowed plus the fee at the time they get the money. Advance America, which operates 20 advance centers in the state, then cashes the check after the two weeks. He said 95 percent of borrowers pay off their loans.
The service, says Fulmer, enables customers to bridge financial gaps between paychecks or meet unforeseen financial emergencies.
That’s not how Margaux Morisseau, co-chair of the Rhode Island Payday Reform Coalition, sees it. The coalition is made up of a number of social service organizations and faith-based groups and individuals from George Wiley Center, CommunityWorks RI, Jewish Federation of Rhode Island, Dorcas Place, Ocean State Action, AARP and several churches. The membership list also includes General Treasurer Gina Raimondo and a number of state legislators and city and town elected officials.
Morisseau, who works and lives in Woonsocket, said she saw “the negative effects on the neighborhood when [payday loan offices] popped up.”
She said people fell behind on their rent and when they researched the reason why, they found payday loans were the cause.
“The loans seem so simple and so simple to get out of,” she said, “but it’s a trap.”
According to information provided the coalition by the Department of Business Regulation, there has been a steady growth in both the number of loans and total volume of loans. In 2008, the industry made 95,931 loans for a total value of $35.8 million. Those numbers for 2012 were 203,958 loans at a total value of $78.6 million. The average loan for 2012 was $385.45.
Committee member Senator Walaska questioned how Advance America collects the 5 percent of the loans not paid off.
“We first encourage them to come back and pay,” said Fulmer. He said Advance would extend the pay period for a couple of pay periods at no added cost. As a last resort, he said, the company deposits the check the borrower gave them. In response to Walaska, Fulmer said Advance does not report failure of a timely payment to the credit bureau.
Fulmer also released the results of a survey of 451 Rhode Islanders showing that 58 percent oppose government restrictions on payday loans that could eliminate access to the credit option; that 67 percent agree that the government should not tell working adults whether or not they can take out a payday loan; and that 55 percent agree that a $10 fee per $100 borrowed is a fair fee for short-term loans.
Morisseau is not surprised by the findings. She says the results were prejudiced by the way in which the questions were phrased.
She referred to a poll conducted last March of 507 Rhode Island voters that found 76 percent favored legislation that would lower the maximum rate from 260 to 36 percent for payday loans and that 74 percent still favored the legislation if it meant lenders would close stores and layoff people.
Carol Stewart, vice president of government affairs for Advance, said that payday lending emerged in the mid-90s as other means of short-term borrowing disappeared. She said that Advance customers “are not the working poor” and that their average income is $50,000. She described customers as young professionals and that some are living paycheck to paycheck.
Stewart said Advance employees, which number 50 in Rhode Island, are concerned about their jobs should the reform legislation gain passage.
And what of those who need a short-term loan, should Advance and companies like it close?
Morisseau pointed to the Capital Good Fund based in Providence and alternatives Raimondo is working to develop.
Reached Wednesday, Walaska said legislators appear to be faced with three options: leaving payday lending as it is; approving the bill that would ensure the industry closes its doors in Rhode Island; or changing regulations such as reducing the fee from $10 per $100 to $8 per $100 and placing restrictions on renewals.
Walaska said, “there aren’t a lot of options” for those requiring a relatively small short-term loan to cope with a financial emergency to make ends meet between paychecks.
“These people don’t have access to credit cards,” he said, “it’s sad that people live literally from paycheck to paycheck.”
He questioned whether the Capital Good Fund is a viable alternative, asking where would the fund get the money to make loans and how would it ensure they are repaid.
“I would be surprised if we did anything to drive the industry out of the state,” he said. “I don’t think this particular bill will pass the way it is.”
The bill was held for further study.