An unfair pay cut

From Tampa Bay Online, in a special to the Tampa Tribune (6/25/09)
By Tommy Moore

These are tough economic times, and Congress is trying to successfully guide our nation back onto solid economic footing. However, it is critical that lawmakers on Capitol Hill do not make the mistake of using the financial crisis as an opportunity to eliminate the payday lending industry.

To prevent any confusion, a payday loan is a two-week loan, generally around $300 dollars, and the fees associated with the loan average about $16 for every $100 borrowed but can be higher. Payday loan stores are not title lenders, installment lenders or check cashers.

The effort to kill the payday lending industry is being spearheaded by two top lawmakers in Washington. Chicago Congressman Luis Gutierrez has introduced legislation in the House that would make many payday lending stores across the United States unprofitable by adding restrictions and establishing a national cap on all payday loans at $15 dollars for every $100 borrowed.

In the Senate, a bill has been introduced by Richard Durbin of Illinois that would essentially close every payday lending store in the United States. The senator’s legislation enforces a 36 percent APR for all loans. This means payday lenders can only charge $1.38 per $100 borrowed over a two-week loan – a fee so low it will put stores out of business.

Backers of Sen. Durbin’s legislation insist that the industry is crying wolf and can live with these restrictions. However, in states that imposed similar lending caps, payday lending stores are about as common as snowstorms in Miami.

In states where payday lending has been eliminated, bankruptcies and other types of financial hardships have increased, according to research.

Even if payday loans are outlawed, millions of people will still need quick access to cash. For some, a short-term loan means the difference between fixing a car and losing a good-paying job in a recession economy. For others, it means stopping a utility company from turning off their means of cooking, bathing or cooling off. We also must not forget those who use payday loans to avoid bouncing checks and paying fees assessed by banks that are often much higher than what payday lenders charge.

One aspect of the payday lending debate I find very troubling is the assertion that we charge people 600 percent interest rates for the loan. This is absurd. The 600 percent interest rate referred to by our critics is an annual rate. Payday loans are taken only for two weeks.

Despite our opposition to being banned by Congress, the payday industry has repeatedly welcomed reasonable regulation. In fact, our industry has worked with 34 state legislatures to support laws that protect customers and preserve access to small-dollar, short-term credit.

But if Gutierrez and Durbin are successful, it won’t prevent people from needing emergency cash or requiring our services. It will only mean that Americans have one less option for short-term cash loans and that they will be forced to choose more expensive alternatives.

Tommy Moore is with the Community Financial Services Association of America.

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