Lawmakers eyeing limits on payday loans

First, Thelma Fleming lost one of her two jobs. Later, she had to pawn some of the gifts her children had given her. Eventually, the bank closed her account, and she had to give up her car.

Fleming’s troubles can be traced back to the $300 loan she took out from a payday lender two years ago after the detox center where she worked closed its doors.

Fleming and an estimated 57,000 other heads of households in Louisiana who go to payday lenders each year would be wise to keep an eye on what unfolds at the State Capitol over the next few weeks, as legislators consider several bills that would put limits on what some call the predatory lending practices used by the payday loan industry.

The concept behind payday loans is simple: Customers borrow a small amount of money and are asked to repay it in a short period of time — typically two weeks. To get a loan, customers write a check for the amount of the loan, plus fees. Lenders hold on to the check until the borrower’s next payday. Borrowers are typically charged between $20 and $55 for each transaction, and are subject to rates that reach as high as 700 percent when calculated annually.

Some Democratic legislators, along with groups representing the elderly, people on fixed incomes and the poor, have targeted the payday lending industry in the legislative session that runs through June 2.

Their goal is to stop what they call abuse by lenders who prey on people in desperate need of quick cash.

They can expect a fight from members of the payday lending industry who argue that what they’re offering is nothing more than a service to extend short-term credit to those who need it. They argue that the majority of their customers are satisfied and people should be free to make their own financial decisions. They add that the industry already is regulated at the state level.

A 2010 survey by the American Payroll Association found that 71.6 percent of American employees are living paycheck to paycheck, putting families in circumstances where short-term loans become an option when they get hit with unexpected expenses.

Payday lending is controversial because of the situation Fleming found herself in two years ago.

When one of her income streams dried up, Fleming struggled to pay her bills, leading her to take out a loan. When the two-week repayment period was up, she didn’t have the money.

Fresh out of options, Fleming succumbed to what is known as the debt trap. She got a second loan to pay off the first, then another and another and another. She took out five loans in total to pay off the first $300 she borrowed, plus interest and fees.

Fleming said it cost her $2,500 to climb out of the debt trap. When it was over, her car, bank account and several mementos from her children were gone.

The mother of three and grandmother of 10 said she’s not an irresponsible person.

“If I have a bill, I pay the bill. The problem was that I just couldn’t get caught up,” she said. “Sometimes you just find yourself in a desperate spot and you do desperate things. I made those choices, and they were bad decisions. But if you have a family, you do what you have to do to keep things rolling.”

Fleming’s story isn’t uncommon.

Critics of payday lending say the loans are geared toward people who are struggling financially. All too often, they find themselves drowning in fees and additional loans.

If a customer borrows $100, he pays a $15 fee. Calculated over an entire year, assuming additional loans, fees and increased compounded interest, the annual percentage rate could reach 700 percent.

Together Louisiana, a statewide coalition of church groups and civic organizations dedicated to addressing socioeconomic inequalities, reports that:

Payday loans factor into 20 percent of bankruptcy filings by people in Baton Rouge.

57,000 Louisiana households take out payday loans each year.

Louisiana families paid $196,394,987 in fees and interest on payday loans in 2011.

Dianne Hanley, a Together Louisiana volunteer, said the key to fixing the industry is addressing the debt trap.

She favors capping payday loans at 36 percent interest and limiting the number of loans a borrower can assume. She compares regulating the payday industry to the government’s regulating the food industry to make sure what people buy in stores is safe for consumption.

But others say the instances where people find themselves overwhelmed by debt because of payday loans aren’t the norm.

Troy McCullen, president and CEO of Finance America Business Group, owns 31 Cash-2-U lenders throughout the state. McCullen previously told The Advocate that payday lenders are unfairly targeted.

He offered this breakdown of a $200 loan: The loan costs $40 if it is paid off within two weeks. If the money isn’t paid back, a 36 percent interest rate kicks in, adding $72 a year. The next year the loan is not repaid, an 18 percent interest rate is attached.

Amy Cantu, a spokeswoman for Community Financial Services Associations of America, said increased regulation of payday lending in other states has had the unintended consequence of forcing lenders out of business. Consequently, borrowers turn to unlicensed and unregulated lenders both in the U.S. and offshore.

Members of the industry further argue that Louisiana is far better than other states because loan renewal fees are forbidden and interest rates are capped.

However, the payday loan industry in Louisiana is not subject to a law that prevents loans with interest rates higher than 12 percent.

Groups on both sides of the issue have conducted a series of polls to bolster their points of view. A Community Financial Services Association poll found that 95 percent of the 1,004 customers who had taken out a payday loan of less than $700 said it should be their choice whether to take out such loans and not the government’s choice.

Together Louisiana looked at legislators assigned to the Senate Judiciary A Committee, a panel that will play a key role in deciding how far payday lending legislation will go during the legislative session.

The group polled registered voters in each legislator’s district and found that between 78 and 87 percent of responders support efforts to lower the interest rates that payday lenders are allowed to charge.

Whether the state adds new regulations to the payday lending industry will come down to the Democrats who have taken up the cause. Among others, state Sen. Ben Nevers, of Bogalusa, and state Reps. Regina Barrow and Ted James, both of Baton Rouge, have filed lending-related bills.

James said his legislation, House Bill 239, addresses what he describes as the industry’s predatory lending practices by capping interest rates at 36 percent.

“The heart of the issue is that we have to change the enormous interest rates being charged,” he said. “I have 12 payday lenders in my district. They are strategically placed to prey on working-class folks who just need a bridge to get from point A to B. Their model is to get people to keep coming back.”

“Unfortunately, there are people who don’t have the financial literacy they should have,” James added. “This is not about baby-sitting people. We regulate banks and lots of other things to protect consumers.”

Michelle Millhollon and Mark Ballard of The Advocate Capitol news bureau contributed to this report.