Payday lenders hearing today

January 10, 2011
by Jerry Mitchell

Mississippi lawmakers will hear testimony today on whether the state law enabling payday lenders to charge the equivalent of 572-percent interest rate should expire.

House Banking Chairman George Flaggs scheduled the public hearing today to allow both sides to explain their positions. The law allowing payday lending is scheduled to expire in 2012.

The hearing follows a Clarion-Ledger series that revealed how some payday borrowers fall into deeper debt and how some payday lenders charge extra fees - violating the law.

Flaggs has introduced a bill that would allow the current law to continue on the books.

"I'm concerned about the cycle of poverty, but I want to let them (payday lenders) stay in business," said the Vicksburg Democrat. "I want to be consumer friendly."

For decades, state law barred anyone from charging Mississippians more than 36 percent interest. But in 1998, state lawmakers created a loophole, enabling payday lenders to charge the equivalent of 572 percent interest.

It's the highest rate in the Southeast and one of the highest in the nation, according to the Center for Responsible Lending.

"If somebody can't make a living on 36-percent interest, maybe they should change businesses," said state Rep. Bob Evans, D-Monticello.

Both he and state Rep. John Mayo, D-Clarksdale, believe the law should expire. "The only difference between payday lenders, title lenders and loan sharks is we make these things legal," Mayo said.

In 2006, North Carolina let its payday law sunset. Seven states and the District of Columbia have followed with similar changes.

Those who support payday lending point out the number of bankruptcies increased in North Carolina after the law expired.

Opponents of payday lending point to a survey in which 77 percent said the shutdown of payday lenders had not affected them, 16 percent said it was positive and 7 percent said it was negative.

The argument that Mississippians can't get small dollar loans without payday lending is not true, said Ed Sivak, director of the Mississippi Economic Policy Center. The center is affiliated with Hope Credit Union, which offers members with poor credit a $500 loan at up to 18-percent interest.

His office has listed more than 600 places where Mississippians can obtain small loans from banks, credit unions and finance companies. "And all of them are subject to the 36 percent interest limit," he said.

Banking Commissioner John Allison has defended payday lending as providing a niche for some consumers.

Under a proposal written by his office at Flaggs' request, the fee would be reduced from $21.95 per $100 borrowed to $18. In addition, the period to pay back that loan would be 28 days for all customers.

This would reduce the equivalent interest rate from 572 percent to 234 percent, Allison said. "I don't think this will be the ultimate bill, but it will be a starting point."

Under the bill, any customer who takes out a payday loan would receive a financial literacy pamphlet and be entered into a statewide database to limit a Mississippian to one payday loan at a time. "It's worked in other states," Allison said.

The bill also would free consumers from any debts from unlicensed payday lenders, including those on the Internet.

"In other words, you don't have to pay it," Allison said. "Most of our complaints this past year were dealing with unlicensed Internet lenders."

Payday lenders also would be able to offer an alternative loan of between $501 and $1,500 in which borrowers would pay a 10-percent origination fee and an additional fee.

For example, the total cost for a $501 loan would be $599.10, or 114 percent interest rate.

While such a loan would remain high risk, payments would be spread out between three and 12 months, Allison said. "To some extent, this lessens the cycle of debt."

Conrad Sanderson, who operates four payday lenders in Mississippi, described the current law as a good one and said he'd like to see it renewed.

For a $100 loan from a payday lender, people must pay back that amount, plus a $21.95 fee by the time of the next paycheck (one week, two weeks or a month).

"People will go out at night and spend that much at a restaurant," Sanderson said.

For years, he worked in the banking industry, looking down his nose at finance centers and payday lenders, he said. "I thought, 'My gosh, they're ripping people off.'"

But now that he operates payday lenders, he knows better, he said. "I've never ripped people off."

The criticism that payday lenders are "exploiting" customers is false, he said. "I get exploited a lot."

In fact, the state Banking Commission regulates payday lenders the same as it regulates banks, he said.

Payday lenders offer loans that others won't, he said.

"I would challenge anybody if they want to lend somebody $325, and they've got a terrible employment record and may move five or 10 times. I guarantee you they'd say no."

Some of those who come in to borrow already have been getting loans through the Internet, where the equivalent interest rate is even worse, he said. "In this economy, you've got to have loans."

Asked about the short amount of time people have to pay back these loans, Sanderson replied, "Anybody ought to be able to pay a $325 loan standing on one foot, but some people don't manage money like other people."

The Rev. Carol Spencer, who chairs the Mississippi Religious Leadership Conference, responded, "How can you pay that back if you work two jobs and still don't have $325 at the end of the month?"

She said religious leaders have problems with "charging 500-plus percent interest to people who can't afford to pay back such loans in such a short time."

They hope to educate the public about the payday lending trap, she said. "In the state with the greatest poverty rates, we are creating downward spirals for people who are trying get up and out of the grips of poverty."