In our work on behalf of consumers, lawyers in the firm come across defective products on a regular basis. In most of these cases, the manufacturers of the products know the dangers, but they place making a profit over the safety of the public. I was struck recently when Stephen Stetson, who works with the Arise Citizens’ Policy Project, characterized payday loans at faulty products. I must say that his was a very accurate comparison. By design, payday loans encourage repeat borrowing, trap borrowers in a cycle of debt with exorbitant interest rates, and damage not only individuals but the communities in which they live.
In Alabama, payday lending companies are allowed to charge interest and fees that amount to an APR as high as 461 percent. If a borrower has any trouble paying back the loan on time, the interest and fees are compounded, creating a cycle of debt that is very difficult to break. The average payday loan is $525. Most borrowers who use these payday lenders become indebted to them for more than five months. A $500 loan can end up costing the borrower more than $1000 in interest and fees. Statistics also show that about 80 percent of payday loans are taken out to pay for another payday loan. And the cycle continues.
Twenty-two states have passed laws regulating the payday lending industry, but Alabama remains a predatory lender’s dream. AL.com reports the only states with more payday lenders per capita than Alabama are Oklahoma, South Carolina, Louisiana and Mississippi. Here, lenders pay state legislators thousands of dollars in campaign funds in exchange for rules that are very pro-industry but destructively anti-consumer. A recent investigation by AL.com revealed every member of the Alabama Senate’s banking committee received campaign contributions from payday lending companies totaling $116,000. Members of the House Financial Services Committee received a combined $97,000 from these businesses.
Some progress has been made. A bill cleared a committee in the Alabama Senate last month that would require payday loan companies to give customers at least six months to pay off a loan, with a maximum APR of 115 percent. Currently, payday lenders can require loans to be paid back in as little as 10 days, and typically between 14 to 30 days, while accruing annual percentage rates of up to 456 percent. Most organizations calling for payday lending reform want to cap interest rates at 36 percent, but so far all those proposals have been defeated by the payday lending industry.
The bill, sponsored by Sen. Arthur Orr (R-Decatur) is said to be a compromise that would allow payday lenders to stay in business while trying to help borrowers actually pay back what they owe. Any lender who can’t make a heathy profit charging 115 percent interest would have to be “dumb as dirt.” Hopefully, this bill will also provide some badly needed protections for folks who borrow from payday lenders. The legislation is said to be modeled after similar legislation that passed in Colorado. Reportedly, that state subsequently saw a decline in payday loans from $95.1 million to $54.8 million; defaults on loans dropped by 23 percent; and the number of borrowers fell by 7 percent. I would want to check out the media reports before taking this as 100 percent accurate. About half the payday loan operators in the state closed and that was a good thing.
Ten states currently ban payday loans. More than 20 cities in Alabama have adopted ordinances restricting payday and title loan operations. Hopefully, the Alabama Legislature will pass some really tough laws that will protect the victims of the payday lenders. The cartoon below, which was illustrated by J.D. Crowe, describes without words the plight of folks dealing with the payday lenders extremely well.
Illustration by J.D. Crowe, Alabama Media Group
Our firm’s experience in litigation with the payday lenders has convinced me that the states that ban these loan sharks are doing the right thing. I only wish the Alabama Legislature would either follow that lead or at least pass strong laws to control the out-of-control loan sharks called payday lenders.
Sources: AL.com, Montgomery Advertiser
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