It is the job of our elected officials, and to some degree of our local newspaper, to dig deep in their search for truth and their quest for what’s right. Often, that search will uncover something unexpected, even shocking.
For example, it may shock some of our elected leaders to learn that many of the so-called “consumer advocates” who plan to introduce new legislation against payday and title lending in Alabama have been bending the truth for years in order to create the perception that short-term loans are bad for consumers. For example, in an op-ed early this month in The Anniston Star (“Usury Incorporated: Some Lending Practices Are Simply Defective,” Feb. 4), one of those advocates made the claim that payday loan borrowers often roll over loans and get themselves into a “cycle of debt.” This is a common claim for advocates fighting to shut down short term lending. It’s also a lie.
“Rollovers,” or loan extensions, are illegal in Alabama. A payday loan customer can’t simply pay the fee and extend the loan; they are required to pay the loan back in full at the end of the loan term.
The suggested “solution” to this “debt cycle” that doesn’t actually exist is to cap rates for these two-week to 30-day loans at 36 percent annually (or 3 percent on a 30-day loan, 1.4 percent on a two-week loan). The author pointed out that a few other states have capped loans at this rate. That’s true. It is also true that this rate cap shut down the industry and cost those states thousands of jobs.
Lawmakers might be shocked to learn that two separate studies from the Federal Reserve have indicated that while those rate caps may have saved consumers money on payday loan fees (since payday lenders no longer operate in those states), they also cost consumers millions more in overdraft fees. Note that overdraft fees are significantly more costly and less convenient for consumers in need of short-term cash.
The bottom line here is that short-term loans are an important part of our financial system and have been for many years. Consumers sometimes need quick cash, and it is necessary to have a regulated system for providing those loans. Could these loans be improved while still being financially viable? Perhaps. But those who actually use these loans seem to be pleased as they very seldom ever file complaints with state regulators.
A 36-percent rate cap that would only serve to eliminate an industry is not the answer. And that’s the truth.
Charles Hunter is the spokesperson for Borrow Smart Alabama, a nonprofit organization that works to protect the rights of short term lending customers and to educate people about the short term lending industry. Web: www.borrowsmartalabama.com.