Lawmakers protect payday lenders, not their customers

A bill to limit payday lending that The Times’ editorial board championed Monday died in a state Senate committee Wednesday, after several lawmakers said they feared the bill would cut off hard-pressed consumers from a ready source of cash.

To which I say, really?

The measure, SB 515, sought to do three things. First, it would have barred lenders from giving more than six payday loans to any individual in a year. To enforce that restriction, it would have required the state to set up a database (at the lenders’ expense) keeping track of the payday loans issued. Second, it would have doubled the minimum amount of time for a borrower to pay back a loan, from 15 days to 30. And third, it would have required lenders to offer borrowers who can’t pay back their loans on time the chance to pay them back in installments over a few months.

Payday lenders argued that the new rules would have put them out of business, leaving consumers at the mercy of less regulated quick-cash outlets online. If that’s true, it implies that the industry’s livelihood depends on customers who take out seven or more loans a year, or those who bounce checks to the lender and so can be charged more fees while they struggle to pay off their loans.

As it happens, the state Department of Corporations reports that the average payday loan customer took out between seven and eight loans in 2011, the most recent year studied. And 7.5% of the postdated checks given to lenders that year bounced, although lenders were able to recover more than two-thirds of the money they were owed.

So, clearly, the industry makes a lot of money off of people who live so close to the financial edge that they need repeat injections of cash, or who can’t quickly pay off what they borrow. That runs counter to the industry’s claim that payday loans are for people who are suddenly hit with a big bill they didn’t expect -- for example, a cracked tooth or a car breakdown -- and just need a temporary assist.

The policy question is whether those borrowers should be able to take out high-cost loan after high-cost loan, or whether they should have a better alternative. Critics of the payday companies, including the Center for Responsible Lending, say that the loans can become a debt trap for people who live paycheck to paycheck. They ask, legitimately, how someone who didn’t have enough left over from her last check to cover $255 worth of expenses would be able to find $300 to spare in her next check to pay off the payday loan. Most likely, that person would have to take out another payday loan soon thereafter to fill the hole left by the last one. That’s how someone goes from taking out one loan to needing seven or more.

Paul Leonard, state director for the Center for Responsible Lending, noted that the Legislature has slashed welfare-to-work grants, low-income health insurance and other safety-net programs in recent years. It’s ironic, he said, that the only empathy lawmakers show for these families is when groups like his threaten to limit access to “super-high-cost debt products.”

Payday companies also complain that they’re already heavily regulated, but that’s true only if you ignore how tightly the state and federal governments oversee more conventional lenders. Governments impose plenty of rules on lenders to protect consumers not just from being misled but also from being taken advantage of when they’re in desperate straits. SB 515 may not have been perfect legislation, but it was consistent with what the government tries to do in the financial industry.

Nevertheless, if the industry’s critics should try again to stop payday lenders from capitalizing on the financial troubles of low-income borrowers, they should look for ways to make more suitable forms of credit available. As reader “juanq40” noted in response to The Times’ editorial, consumers typically cannot obtain installment loans for amounts less than $2,500. The state has tried some pilot projects with small-dollar installment loans, but the business has yet to gain traction.

Maybe those who’d like to limit the number of payday loans per consumer could couple that proposal with a new initiative on small-dollar installment loans. That way, at least, they’d have an answer when lawmakers say they worry about cutting off their less fortunate constituents after half a dozen payday loans.

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Follow Jon Healey on Twitter @jcahealey