On the heels of a survey that found support among 60 percent of voting age Louisiana residents, the AARP announced Monday it was preparing legislation that would limit the long-term interest rates for “payday” loans.
“We want legislation to cap the interest rates at 36 percent,” said Andrew Muhl, director of advocacy for AARP Louisiana. “That’s the cap the federal government put on payday loans for active military personnel. It brings Louisiana in accordance with federal law for active military.”
“Payday” borrowing is generally short-term — usually a couple weeks or to the next pay check — and for small amounts, $50 to $350. More often than not the loans are not repaid promptly, thereby requiring another loan with increased fees, Muhl said.
The annual percentage rate, or APR as it is more frequently known, on the average payday loan is 782 percent in Louisiana, he said. AARP is discussing how exactly the bills will be worded with a few legislators. The general session of the Louisiana Legislature begins March 10.
Amy Cantu, a spokeswoman for Community Financial Services Association of America, said a number of states have looked at capping annual interest rates at 36 percent and the move has the unintended consequence of forcing the lenders out of business. Consequently, consumers turn to unlicensed, unregulated lenders both in the U.S. and offshore.
“You’re not removing the need for credit, but you are removing the providers, at least the safe and reliable ones,” said Cantu, whose trade organization for the industry is based in the Virginia suburbs of Washington, D.C.
Payday lenders argue that interest rates in Louisiana already are capped, since the interest rates on a defaulted loan cannot exceed 36 percent. However, lending and documentation fees can make the annual percentage rate balloon.
The idea of capping long-term interest rates at 36 percent also has the support of 60 percent of Louisiana residents over the age of 18, according to a survey AARP Louisiana released Monday. Fifty-eight percent of those answering the survey questions said they would be more likely to vote for a candidate that supports capping payday lending, the poll stated.
A total of 600 people answered the 28-question survey during phone interviews between Oct. 2 and Oct. 7. About 24 percent of the respondents were black, 47 percent described themselves as conservative and 39 percent made more than $50,000 a year. The margin of error is +/- 4.08 percent.
Muhl said his organization, which advocates for the elderly, has about 500,000 dues-paying members in Louisiana. AARP has noticed that more and more retirees, many of whom live on fixed incomes, have become increasingly vulnerable to lending practices, he said.
Fifteen states ban payday loans, according to the Louisiana Budget Project, a Baton Rouge-based group that studies the impact of government policies on the poor and middle income. Nine other states stringently regulate the industry. Louisiana is one of those 28 states that have a law but the law is ineffective, said David Gray, policy analyst for the Louisiana Budget Project.
“Our state protections don’t really prove effective,” Gray told the Press Club of Baton Rouge on Monday. The average Louisiana customer takes out eight additional loans to pay the one loan. The average Louisiana customer pays $270 fees for a $100 loan, he said.
Jabo Covert, vice president of government affairs for Check Into Cash, a payday lender with about a thousand stores in 31 states, said the math AARP and the Louisiana Budget Project uses is wrong.
“Our customers use the products more than once. But this is a mythical person that they have invented,” Covert said.
If a customer borrows $100, they pay a $15 fee, for instance. Calculated out over an entire year, assuming additional loans, fees and increased interest compounded over a year, then the annual percentage rate could reach 700 percent.
“But that’s not how our customers borrow. They pay it back on a short-term basis,” Covert said. Using the same methodology, he said a $37 late fee on a $100 credit card balance calculates out to a 965 percent APR.
Covert said regulated lending businesses offer customers who cannot pay a plan to pay over time.