Bill Needs Strengthened to Protect Families from Debt Trap

Payday Loans Bill Passes House Committee

Kentucky Youth Advocates – Press Release

For Immediate Release

February 25, 2009

Frankfort, KY– Today the House Banking Insurance Committee passed HB 444 which introduces a database to track payday loans. The bill, sponsored by Representative Johnny Bell was passed out of committee with significant support. However, members of the Kentucky Coalition for Responsible Lending believe that the bill it not strong enough to truly address the cost of payday lending to families in Kentucky and is actually a weaker bill than a database bill passed on the House floor last year.

“The problem of payday lending is pervasive in Kentucky. We need substantive reform that will truly protect families, not lip service reform like what was passed today,” says Terry Brooks, executive director of Kentucky Youth Advocates.

Brooks and other members of the Kentucky Coalition for Responsible Lending attended the committee meeting and were prepared to testify. However, committee chairman Jeff Greer did not invite public testimony on the bill.

Kentuckians lose $131 million annually in fees to payday lenders, who currently charge interest rates upwards of 400% APR. Research shows that nine out of ten payday loans are made to repeat borrowers who take out five or more payday loans in a year. The short timeframe of payday loans means Kentuckians are often unable to pay off the loan principal and end up paying one off to take out another immediately.

“These are hazardous products that are trapping families in debt,” says Nancy Jo Kemper, executive director of the Kentucky Council of Churches. “Of course families need to make ends meet, but paying 400% interest is not helping them.”

Kentucky’s House of Representatives passed a similar database bill in the 2008 legislative session that was better for consumers. However, this year’s bill actually raises the cost to users of payday loans. The bill allows database fees to be passed onto the consumer, rather than making the companies pay. It also allows the current method of calculating interest stand, in which payday lenders can take the interest fee out of the loan amount, so borrowers actually walk out the door with less money.

Another bill has been filed this session that has stronger protections for consumers. On Monday, Representative Joni Jenkins filed HB 516 which will put a 36% cap on the interest rates that payday lenders can charge, extend the loan payback period to 30 days, and limit the number of loans a consumer can take to 4 per year among other consumer-friendly provisions.

“In a time of recession and hardship, we need to safeguard every penny of families’ money,” says Kemper. “If legislators are serious about protecting families, they need to support a stronger bill.”

In recent years, the U.S. Department of Defense recognized that payday loans were leading to significant debt for members of the military, putting them at risk of losing their security clearance.  In 2007, in response to those concerns, Congress passed a law capping payday loan interest rates at 36% for military families.

“If a 36% rate cap is good enough for military families, it’s good enough for Kentucky families,” says Anne Marie Regan, senior staff attorney for Kentucky Equal Justice Center.

Currently, 15 states (including border states Ohio and West Virginia) and the District of Columbia have laws capping rates or do not authorize payday lending. Ohio voters recently upheld a 28% cap on the rates payday lenders can charge, with 64% of voters supporting the cap. Representative Jenkins’ bill is based on Ohio’s model.

“There is still plenty of time for the legislature to do the right thing for Kentucky families,” says Regan. “They can still amend Representative Bell’s bill and make it better for consumers.”

A rapidly growing group of organizations around the state are joining together in support of reasonable lending reform for the Commonwealth and are calling themselves the Kentucky Coalition for Responsible Lending.