Is a $1,500 loan worth it if it costs you $1,500 more in interest and fees?
This is what payday lenders would be allowed to charge cash-strapped consumers in Louisiana if Gov. John Bel Edwards allowed it Senate Bill 381 become law.
The legislation would allow lenders to offer installment loans worth up to $1,500 over terms of three to 12 months, with an annual interest rate of up to 36% and monthly “maintenance fees” of up to reach 13% of the original loan amount. Loans over $400 may also incur a $50 underwriting fee.
The proposal, which has passed through the Legislature and is now on Edwards’ desk, would cap finance charges at 100% of the original loan amount, meaning lenders could charge up to $1,500 in fees on a loan of $1,500, for a total repayment of $3,000.
SB381 sponsor State Sen. Rick Ward, a Republican from Port Allen, dubbed the measure the “Louisiana Access to Credit Lending Act” and says the new loan product will help residents. from Louisiana living on paycheck to make ends meet in the face of surprisingly large expenses.
But critics say it’s a predatory product and that allowing payday lenders to make larger, longer-term loans with exorbitant fees will trap low-income Louisiana residents in cycles of debt.
“This harmful bill targets working Louisiana families who don’t deserve their scarce wealth stripped away by a machine designed to entrap them,” said Davante Lewis of the Louisiana Budget Project, which advocates for low-to-moderate income residents. “The governor should immediately veto this bill.”
The state’s current payday loan system allows lenders to offer a loan of up to $350, due on the borrower’s next payday. The maximum a payday lender can make per loan is $55. Ward’s proposal does not replace or reform this system. Instead, it creates a new product.
Lenders offering the new product described in SB381 would make most of their money from a monthly “maintenance fee” worth up to 13% of the original loan amount.
For a loan of $1,500, these costs would amount to $195 per month.
Alex Horowitz, consumer credit researcher at The Pew Charitable Trusts, said he had never seen such large charges.
“We find that the bill would expose consumers in Louisiana to financial harm, rather than create an affordable loan market like those seen in states that have successfully reformed their payday loan laws,” Horowitz written in a letter both Ward and Edwards.
Kenneth Pickering, who twice served as Louisiana’s top banking regulator, said he had no idea what the monthly maintenance fee even covered.
“Once a loan is on the books, there’s nothing to maintain,” he said, adding that the charges were “nothing but interest.”
Pickering, who represents the Louisiana Finance Association, an organization of more than 600 state-based lenders, told lawmakers, “These charges make this bill, in my view, a violation of our usury laws. in Louisiana”.
“The good alternative”
Ward says the new loan product is needed for Louisiana residents who can’t get a similar-sized loan elsewhere.
“As soon as someone comes up with an alternative, and I’m not talking about an alternative that’s just a pie in the sky, but a viable alternative, I’ll be there to support it, but I don’t haven’t seen yet,” Ward told his colleagues. “In the meantime, I think that’s the best we have to offer.”
But Stanley Dameron, whom Edwards appointed commissioner of the Office of Financial Institutions, told lawmakers there were plenty of alternatives.
“Some of the people applying for these loans might not qualify with your bank, but they certainly would qualify with a credit union or finance company,” Dameron said.
Jessica Sharon of Pelican State Credit Union told lawmakers it’s a “myth” that there aren’t similar loan options available to people in financial difficulty. She noted that credit unions were explicitly created to help people of modest means.
“Our goal is to help people who are struggling with their finances, who have low incomes, low credit scores,” Sharon told lawmakers. “Not only are we against (SB381), but we know we are the right alternative.”
There are 165 credit unions in Louisiana and 133 specifically serve low-income populations, Sharon said, adding that many already offer installment loans, without having to charge a 13% monthly maintenance fee.
Ward argues the legislation would help those whose financial history has prevented them from opening a bank account. But Horowitz, with Pew, said payday loan borrowers are required to have a checking account somewhere.
“It’s not the unbanked,” Horowitz said. “They must have a checking account to get a payday loan.”
Horowitz noted that seven of the nation’s 12 largest banks have launched, or recently announced, programs to provide small-dollar loans to customers.
Local vs National
The Backing Ward proposition is a pair of out-of-state companies that together own dozens of Check Into Cash and ACE Cash Express locations across the state.
But not all payday lenders agree with the bill.
Troy McCullen of the Louisiana Cash Advance Association, which represents Louisiana-based payday lenders, said the new product was unnecessary.
“These loans are already available in Louisiana at a fraction of the cost,” McCullen said. “It’s greed and arrogance at the highest level.”
McCullen made similar comments four years ago, when Ward sponsored a different measure to allow payday lenders to offer longer-term installment loans. This measure failed to pass a House committee.
Pickering, with the Louisiana Finance Association, said another problem with SB381 is that it only gives borrowers one day to cancel the loan. He said it’s “a very short amount of time for anyone to reconsider”.
He also noted that the 100% cap on fees and interest does not include late fees or insufficient funds charges.
Supporters of SB381 include Community Choice Financial, an Ohio-based company that owns Check Into Cash, and Populus Financial Group, a Texas-based company that owns ACE Cash Express.
Finance America Business Group, a Louisiana-based company that owns the Cash 2 U storefronts, also supports the measure, as well as the Louisiana Payday Loan Association, which represents local lenders.
The bill rolled out of the Senate in April by a vote of 20 to 14, just enough to pass. State Sen. Gary Smith, whose wife, Katherine Smith, is a registered lobbyist for Community Choice Financial, was the only Democrat in that initial vote to support the measure.
“She never told me about it,” Sen. Smith said in an interview, adding that payday lenders are the “only place some people have to go to get a loan. They can’t go to a bank. They can’t go to a credit union.”
The measure passed the House by a vote of 54 to 35 in May.
The Legislature sent the bill to Edwards’ office on May 19. Under Louisiana’s constitution, the governor has 10 days after receiving a bill to sign it, veto it, or let it become law without his signature.