Put Interest Cap on Payday Loans – Editorial

5 01 2011

Editorial published in Lexington Herald-Leader (1/4/11)

The payday loan industry reported spending almost $120,000 in the first eight months of 2010 lobbying Kentucky’s legislature.

Advocates for the payday loan industry’s prey, er, customers, don’t have that kind of money to get out their message.

But they do have some compelling facts, if only lawmakers can turn down the volume of special-interest money long enough to listen.

The Consumers’ Advisory Council, a body created by the legislature to advise it, is urging lawmakers who convene today to impose a 36 percent interest rate cap on payday lenders.

The council, which held three public hearings last fall, listened to payday lenders, as well. One of the industry’s most persuasive arguments is that the exorbitant fees charged by banks on overdrafts and for services are unregulated and that payday loans are a better deal than paying the bank fees.

But, after considering the industry’s case, the consumers’ council decided it was in Kentucky’s best interest to join 15 other states that have enacted a 36 percent cap on payday loans, the same cap that Congress imposed for the protection of military service members.

Back in 1998, when the General Assembly first regulated payday lenders, one of the main worries was that consumers were being “rolled over” from one high interest loan to the next and incurring insurmountable debt that would lead to bankruptcy.

To address this concern, the legislature limited customers to no more than two loans totaling $500 in a 14-day period.

But the two-loan limit isn’t working, based on information from an electronic database of payday lenders authorized by the legislature last year.

“The data show that the average consumer is trapped in a debt cycle,” wrote Todd E. Leatherman, executive director of the state Office of Consumer Protection, in a letter on behalf of the advisory council to House Speaker Greg Stumbo and Senate President David Williams.

“According to the data, 83 percent of payday loans went to consumers who took out five or more loans at an APR of 391 percent during a five-month period. On a typical loan of $255, this amounts to $90 in fees per month. What is offered to a consumer as a short-term, stopgap loan, often becomes an insurmountable financial burden due to the high interest rate of this product,” Leatherman wrote.

A study released in October by economists at Vanderbilt University and the University of Pennsylvania found payday borrowers are twice as likely to declare bankruptcy as other similarly situated consumers.

Short of imposing a 36 percent cap, the council recommends other protections, such as additional consumer disclosure, allowing extended payment plans and imposing a cooling off period between loans.

Read more: http://www.kentucky.com/2011/01/04/1586537/put-interest-cap-on-payday-loans.html#ixzz1A8Y4je9w

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State’s Consumers’ Avisory Council Votes to Approve 36% Payday Lending Cap

12 12 2010

Consumers’ Advisory Council Calls on Lawmakers for 36% Cap on Payday Loans

Capping interest rates at 36% in best interest of Kentucky.

The Consumers’ Advisory Council (CAC) voted Dec. 9th to officially recommend legislation capping interest rates on payday loans at 36% APR. In a letter to House and Senate leaders, the Council concluded that a rate cap is “in the best interest of Kentucky.” The Council’s recommendations are expected to boost consumer groups’ and lawmakers’ continued push for a 36% cap in the 2011 General Assembly.

“We applaud the Council’s work and for recognizing the harm of a loan product that carries 400% interest rates – and the urgent need to protect consumers,” said CLOUT Board Member, Jimmy Mills.  “There is broad statewide support for lowering abusive 400% rates in favor of a common sense 36% cap for payday loans, just like Congress did for the military and 17 other states have done,” said Anne Marie Regan, senior staff attorney for Kentucky Equal Justice Center and co-chair of the Kentucky Coalition for Responsible Lending (KCRL).

At a series of three public hearings called for by CLOUT (Citizens of Louisville Organized and United Together) in Newport, Lexington, and Louisville, Council members heard personal accounts of consumers being caught in payday lending’s cycle of debt.  Consumer advocates, using data from the state’s new payday loan database, testified that both the numbers and stories show that the typical payday loan results in long term debt, not a quick financial fix.

“Data from the state’s database shows that the average borrower in Kentucky has already taken out 8.6 loans this year, translating into more than $80 million in fees alone” said Pendleton County resident Brigitte Blom Ramsey, Director of Special Projects at Kentucky Youth Advocates.  “These fees represent a loss of valuable financial resources to Kentucky families and communities, with the vast majority of the money going to out of state payday lenders.” 

The new Kentucky data also showed that at least 83% of payday revenue has been generated by borrowers with five or more transactions this year. In contrast, just 2% of payday revenue is generated by customers who only used one loan.

The Council’s letter also noted additional measures, such as, a cooling off period between loans, extended payment plans, and enhanced consumer disclosure. However, at the same time the Council recognized other states’ experience showing these same measures “appear to be ineffective” to address consumers’ needs once caught in the cycle of debt created by payday loan’s high interest rates.

In other states where 400% interest payday loans are is still allowed, repayment plans and cooling off periods fail to lower the costs of loans or change patterns of repeat borrowing.

KCRL with some 65 other organizations and supporting legislators will seek a 36 percent cap in the 2011 General Assembly. 

 “Payday loans are not an answer to the financial emergencies that are hitting Kentucky families. When families get sucked into the debt trap and are forced to pay excessive fees every two weeks it directly affects their ability to meet their monthly obligations such as rent or mortgage payments, utilities, and essential needs of their family,” said Penny Young, Executive Director of the Homeless and Housing Coalition. “These loans are predatory and take advantage of our most vulnerable populations. It’s time for our legislators to take action and follow the consumer advisory council’s recommendation for a 36% cap.”





Debt Trap Continues – KY Youth Advocates Testimony Before Consumers’ Advisory Council

12 12 2010

Testimony before the Kentucky Consumers’ Advisory Council

Testimony submitted and presented by: Brigitte Blom Ramsey, Kentucky Youth Advocates

Data prepared by: Melissa Fry Konty, Ph.D.,Research and Policy Associate, MACED

 Good Afternoon:

 Thank you all for being here and for taking the time to hear from a range of voices about the impacts of payday lending on Kentucky’s hardworking families. My name is Brigitte Ramsey. I live in Northern Kentucky and work for Kentucky Youth Advocates.   Kentucky Youth Advocates is a statewide nonprofit organization working to increase the well-being of children and families in the Commonwealth. We are part of the Kentucky Coalition for Responsible Lending because we see how payday loans can devastate the financial security of Kentucky households.

 In February, the Coalition released a report entitled, “The Debt Trap in the Commonwealth: The Impact of Payday Lending on Kentucky Counties,” which you should have already received as part of your packets.  Our research is based on 2008 data from the Department of Financial Institutions and uses models constructed by the Center for Responsible Lending in North Carolina based on data from databases, much like our new one, in 19 other states. In the couple of minutes that I have, I will highlight the findings from our study, and briefly address preliminary findings from current data generated by Kentucky’s new payday lending database, with particular attention to Northern Kentucky counties.

In 2008, 95 of Kentucky’s 120 counties were home to 781 payday lenders. To put this in perspective, there are approximately 250 McDonald’s in the state. Kentuckians paid upwards of 400 percent interest on nearly 3 million loans, totaling approximately $158 million in predatory loan fees – in one year.

When we say “predatory fees” we refer to the fees paid by borrowers who take out five or more loans in a year: those borrowers are stuck in a debt trap. The fees associated with these repeat loans are considered predatory, because they are collected as the result of a business model built on people’s inability to repay a loan with such a short term. According to the Commonwealth’s new database, 83 percent of Kentucky’s payday loans from May thru September went to consumers who took out 5 or more loans during that 5 month period.

Northern Kentucky is not immune from the ills caused by the harmful payday product.  There are currently 49 payday lending establishments scattered across six of the eight counties that make up the northern Kentucky region.  Combined these lenders have charged more than $7.4 million in fees in the first nine months of 2010.[1] This represents a loss of scarce resources for families and individuals who are already struggling to make ends meet. 

 (Verbally – Here you can see the counties where payday lenders are in operation.  You can see that Kenton County is home to the largest number of payday lenders in the northern Kentucky region with 17 operations where borrowers paid nearly $2.4 million in fees – again representing a drain of resources families need to be self-sufficient and make ends meet.)

 Northern Kentucky Counties

Licensee County Deferred Deposit Licenses as of October 2010 Total All Transactions Estimated Loan Volume Based on Average Loan Size Estimated Total Fees (based on average fees per transaction)
Boone 13  $         38,439  $ 11,949,006  $    1,968,030
Campbell 12  $         36,581  $ 11,371,435  $    1,872,903
Kenton 17  $         46,411  $ 14,427,152  $    2,376,187
Carroll 3  $           9,557  $   2,970,854  $       489,307
Grant 3  $         13,550  $   4,212,103  $       693,743
Pendleton 1  $           1,400  $     435,199  $         71,678
Total 49  $       145,938  $ 45,365,749  $    7,471,848

This is not simply a problem for urban families. (As you can see Carroll, Grant, and Pendleton – rural counties in northern Kentucky all have payday lenders.  Carroll and Grant each have three and borrowers paid nearly $500,000 – $700,000 in fees.)  We found the highest concentration of payday lenders in rural Mason County, (adjacent to northern Kentucky, and) home to roughly 17,000 people. Today, Mason County has nine payday lenders in operation and the highest per capita debt load in the Commonwealth.  (Per capita debt load is defined as the amount of loans and fees if spread across the adult and child population in the geography.)

Select Eastern Kentucky Counties

Licensee County Deferred Deposit Licenses as of October 2010 Total All Transactions Estimated Loan Volume Based on Average Loan Size Estimated Total Fees (based on average fees per transaction)
Boyd 18 40,341 $12,540,254 $2,065,410
Floyd 6 13,344 $4,148,067 $683,197
Perry 9 19,230 $5,977,767 $984,553
Whitely 12 24,108 $7,494,124 $1,234,300
Total 45 97,023 $30,160,212 $4,967,459

A large portion of the money paid in fees to payday lenders leaves our communities. The majority of payday lenders in Kentucky are nationally owned and their profits leave the state. As shown, payday lending has contributed to a wealth drain of nearly $7.4 million in northern Kentucky counties alone in 2010.

Payday lenders locate in low- to moderate-income neighborhoods where people are most likely to need access to small-dollar credit—but the families in these neighborhoods are also least likely to be able to repay the loans within the two-week term while still meeting their financial obligations – creating a cycle of need that leads to a debt trap – (and a threat to a families financial stability).

Payday loans threaten the economic security of Kentucky’s families – particularly single mothers with children.  The payday lending industry’s own research shows that 60 percent of borrower’s are women; 49 percent of payday borrowers have a dependent child; and that borrowers are less likely to be married compared to the national average.[2] 

Since 2008, the number of payday lenders in the state of Kentucky has declined from 781 to 667, but this is still 2 and half times more than the number of McDonalds in our state. Some might argue that the database is responsible for this decline. Rather, we submit that the moratorium on new licenses is responsible for the slowed growth as no new licenses could be issued this year.  Further, continued job loss and broad economic decline both associated with the national recession are likely responsible for the closure of some stores.  Finally, the database likely made business less profitable for some lenders, causing them to close their doors. However, the data show that those still in business continue to trap borrowers in the debt cycle produced by a product with high fees and a short repayment period.] 

In the first nine months of 2010, payday lenders made nearly 1.6 million loans totaling more than $486 million in paycheck advances and more than $80 million in fees.[3] These 1.6 million loans went to 182,159 people – an average 8.6 loans per borrower. As previously stated, 83 percent of payday revenue in the first five months of the database came from borrowers with five or more loans.

These figures demonstrate that the debt trap continues in Kentucky, and illustrates a direct contradiction to the claim that the payday loan industry business model is to provide quick loans for short-term use only. Rather, these numbers confirm that borrowers find themselves stuck in a chronic situation resulting from high borrowing fees that drain families’ resources and a short repayment period that does not allow a families budget to recover before the loan must be repaid.   The data from the new database clearly shows that the industry derives the bulk of their revenue from borrowers stuck in this cycle of debt.

The database indicates a low 2.25 percent default rate. This may lead some to conclude that we do not have a problem. However, the structure of these loans means that borrowers pay them back on time straight out of their paycheck on payday. This tells us nothing about how many of them follow up their repayment with a new loan as soon as possible. Again, the ratio of number of loans to number of borrowers is indicative of the repeat borrowing debt trap that hardworking families in the Commonwealth continue to experience, even with the database in place. 

In May of 2010, 51.5 percent of requests for payday loan transactions were declined. By September the decline rate had dropped to 8.8 percent. Declines resulting from the implementation of the database would be those loans requested by people with two or more loans already out. While some may say the reduction in the decline rate suggests improvements as fewer people appear to be trying to take out more than two loans at a time, this misses the point. Reducing the number of borrowers that have more than two loans out at a time reduces the risk to the lender, but it does not significantly reduce the risk to borrowers. Borrowers are still able to carry two loans at a time, which carry the same 400% interest rates just like they always have.  Thus, borrowers are unable to pay them off and still meet all of their obligations, and open new loans as soon as they pay off prior loans. As previously stated, the ratio of total loans to number of borrowers clearly reflects this pattern with an average 8.6 loans per customer in 2010.

(During the first months the database was operational – ) borrowers across Kentucky paid an estimated $35.7 million in fees from May to September of this year. During the same 5 month period, just 2.5 percent of payday lending revenue was generated by customers who took out only one loan

Though the database provides useful information, it has not curbed the debt trap (nor has it protected financially vulnerable families from predatory practices). Only a return to a 36% rate cap can spring Kentuckians from the payday lending debt trap.


[1] These estimates are likely to be low. The Department of Financial Institutions indicated that not all lenders provided data for January through April. We can only be sure we have full data from May 2010 thru September 2010.

[2] Payday Advance Customer Satisfaction Survey conducted by the Cypress Research Group, 2004.

[3] These estimates are likely to be low. The Department of Financial Institutions indicated that not all lenders provided data for January through April. We can only be sure we have full data from May 2010 thru September 2010.





Payday Loan Interest Rates – Editorial

21 12 2009

Cap payday-loan interest rates

Editorial published Dec. 20, 2009 – Lexington Herald-Leader

Not that long ago, payday lenders were called loan sharks and what they did was illegal.

Cap Payday-Loans Interest Rates

It’s easy to forget that because the payday-loan industry has amassed so much power and sunk its hooks so deep into the legislature, all in less than 20 years.

Kentucky should join other states, including Ohio and West Virginia, that have turned back the clock on legalized loan sharking.

Fourteen states and the District of Columbia have imposed reasonable limits on how much payday lenders may charge. Without a legal cap, annual interest rates often run above 400 percent.

It won’t be easy. With their market shrinking because of all the new laws, predatory lenders will fight harder than ever to hold on to Kentucky. A few years ago, the state was getting a new payday lender every four days.

It’s obviously a lucrative market — for the lenders.

For borrowers, it’s a road to burial in debt, bankruptcy and homelessness.

Just look at the coalition lined up to support new limits on payday lenders and you get a feel for how wide is the harm inflicted by this industry.

More than 60 members of the Kentucky Coalition for Responsible Lending, from across the state and political spectrum, are lined up in support of limits on payday lending. They include groups that serve the poor and elderly, housing agencies and shelters, asset-building and economic development groups, legal aid, religious groups, advocates for domestic-violence victims, even a couple of financial institutions.

There wouldn’t be such widespread concern if real people weren’t being hurt.

Gov. Steve Beshear is on board. Although Beshear once lobbied for the payday-loan industry, he promised earlier this year to support an annual interest cap of 36 percent on short-term loans. He renewed that promise last week.

As it stands now, three out of four borrowers can’t afford to repay their loans at the end of the two-week period. So they must keep borrowing, and paying exorbitant fees, sometimes until they owe more than they borrowed in the first place.

One advantage of capping the annual interest rate at 36 percent is that borrowers could actually afford to pay off a two-week loan rather than having to keep borrowing.

Beshear noted that Congress imposed a 36 percent cap on loans to military personnel to protect them.

What’s happened since then is instructive. Credit unions stepped up to increase small loans to cover immediate cash needs among military people.

In North Carolina, which did away with payday lending, a study found the loans weren’t missed and that people found alternatives.

The Federal Deposit Insurance Corp. is piloting a small-dollar loan program, encouraging banks to offer affordable small loans as an alternative to predatory lenders.

But banks and other traditional institutions will shy from the short-term, small-cash loan business until the legislature levels the playing field for them by capping rates on payday loans.

The payday loan industry insists that it’s simply filling a demand and saving people from bankruptcy and eviction — which is also what the loan sharks said.

© 2009 Kentucky.com and wire service sources. All Rights Reserved. http://www.kentucky.com