State lawmakers target payday loan rates

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By Tom Saul | Wednesday, December 3, 2008 8:46 PM CST | () comments

Exorbitant interest rates on short term payday loans harm vulnerable consumers and should be made illegal, said two Iowa state senators who stopped in Davenport Wednesday to propose legislation to cap interest rates.

Sens. Tom Courtney, D-Burlington, and Roger Steward, D-Preston, said they will propose a bill during the legislative session that starts in January to cap payday loan rates at 36 percent per year, the same maximum other lending institutions in Iowa are allowed to charge.

Now, annual interest rates can run as high as 400 percent for payday borrowers who take out two-week loans and roll them over for an entire year, Stewart said.

“A $30 fee to borrow $200 for two weeks, that’s outrageous and should be made illegal,” Stewart said.

If that loan were rolled over 12 times in a year, the borrower would repay $360, according to an annual percentage rate calculator at the Web site of the Missouri Attorney General. If it were rolled over every two weeks for an entire year, the borrower would repay $780.

The payday loan industry will likely fight any effort to cap interest rates, said Steven Schlein, spokesman for the Community Financial Services Association of America, a trade group for the payday loan industry based in Alexandra, Va.

A cap of 36 percent would put the industry out of business in Iowa, Schlein said. That would allow operators to charge only $1.38 per $100 for a two-week loan.

“They need $12-to-$13 to break even,” Schlein said. “They should just be honest and call it what it is, a ban.”

Schlein also disputed claims that the industry targets those least able to repay the loans. He called that “an inane concept. What kind of business targets those who can’t pay? That’s an absurd notion,” he said.

Fifteen states and the District of Columbia now either cap payday loan interest rates or ban them outright, said Uriah King, a policy analyst for the Center for Responsible Lending, a Durham, N.C.,-based advocate for fair credit terms.

In many of those states, lawmaker reasserted state authority to cap rates on small loans after seeing the effects of granting exemptions to payday lenders, King said. As a result, the industry has evolved into what King called “financial Quicky Marts.”

“They cash checks, they do wire transfers, they buy gold, they rent to own, they do a number of different things,” King said. “The industry doesn’t go away. In states where regulation has been imposed, it changes to offer a number of different products.”

Stewart and Courtney were at United Neighbors to recommend that consumers stay away from payday loan offices during the holiday season to avoid exorbitant interest rates that will result in excessive post-holiday bills. Instead, consumers should stay within a budget, or better yet, give gifts that don’t cost anything.

“A certificate for lawn mowing or house cleaning would be a good idea,” Courtney said. “With the bad economy, it is much better not to go into debt then to get a few moments of pleasure under the Christmas tree.”

Past proposals to cap payday loan rates has failed in the legislature, Stewart said. With Democratic control of the governor’s mansion and both houses of the General assembly, a cap now has a better than average chance of passing. Last year, lawmakers reigned in rates on car title loans.

Last month, Quad-Cities Interfaith and five area credit unions announced plans to distribute 20,000 brochures throughout the area to warn people away from payday loans. Instead, the brochure directs people to the credit unions that offer small personal loans, secured credits cards and personal lines of credit at 21 percent annual percentage rates. Area banks also offer the products.

“All you have to do is open an account for as little as $5,” Rita Cunningham of Interfaith said of credit unions Wednesday.

At a glance: Payday loans

The following are facts and figures for payday loans in Iowa:

In 2006, payday lenders made 917,200 loans for an average of $290 each

The average amount financed per borrower in 2007 was

$303 with a finance charge of $38.84. That comes to an average annual percentage rate of 287 percent

The average Iowa borrower takes out 12 loans a year, higher than the national average of 8.7 per year

More than 6 percent of Iowa borrowers roll their loans over every two weeks

Only 1 percent of loans are made to one-time borrowers

More than 6 percent take out a loan every two weeks

A borrower unable to repay a loan within four months often repays more in fees than the loan is worth

Iowa law limits borrowers to two loans per office locations per year totaling no more than $500

By law, payday lenders can now charge over 400 percent annual percentage rates on a 14-day loan

The number of payday loan locations across the state rose from 144 in 2002 to 277 in 2007

Source: Iowa Division of Banking, Legislative Services Bureau

Tom Saul can be contacted at

(563) 383-2453 or tsaul@qctimes.com.

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