Loans

In Depth: Lawmakers Again Reject Payday Loan Interest Cap

by Tony McVeigh on February 17, 2011

Payday lenders in Kentucky won a victory in Frankfrot this week, as a legislative panel refused to clamp down on the industry.

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For three years, Louisville Representative Darryl Owens has been trying to convince his colleagues to place a 36 percent annual cap on payday loans. But his bill never went anywhere. It never even got a committee hearing, until now.

“Simply stated, payday lending affects our most vulnerable citizens – the poor and senior citizens,” said Owens. “The very people we were elected to safeguard.”

Owens told the House Banking and Insurance Committee payday loans are nothing but a debt trap. In the first nine months of 2010, Owens says Kentucky borrowers, on average, took out nine payday loans, paying $440 in fees to borrow an average $310. He says the loans are too punitive, and Kentucky should follow Washington’s lead.

“The federal government capped payday loans to military servicemen at 36 percent,” said Owens. “And I think it’s important to understand why they did that – because the high, exorbitant rate was affecting the national security of this country. You had military guys who could not obtain clearances because of the amount of indebtedness that they had.”

Mary Love, an Oldham County retiree on a fixed income, says she fell victim to payday lenders when she borrowed $400 and kept renewing the note every two weeks for about a year.

“Altogether, I had paid around $1,450 in fees on a loan of $400,” said Love.

Love eventually got some credit counseling, paid off the debt and has never again taken out a payday loan. Also testifying against the bill was an AARP representative, who accused the payday industry of preying on seniors and the poor.

But the industry fired back. John Rabenold of the Deferred Deposit Association says payday lenders provide a valuable service to 180,000 Kentuckians who have nowhere else to turn for short-term loans.

“Eliminating payday from the state, you favor the Costa Ricans,” said Rabenold. “You favor the Modoc Indian tribe in Miami, Oklahoma. There is Internet lending. It’s very prevalent. And this is a choice of – are we going to help out the Kentucky-based businesses, or are we going to export all that to out-of-state businesses?”

Rabenold says payday lenders employ 2,000 Kentuckians, at an annual payroll of $35 million. Their building leases pump $20 million into local economies, plus another $30 million for goods and services, like signs, window washers and carpet cleaners.

“Not to mention, when the consumers take the money, they go spend it somewhere,” said Rabenold. “They spend it at medical centers. They spend it at veterinarians. They spend it at mechanics. They spend it at the grocery store.”

After hearing all the testimony, many committee members, including Representative Dwight Butler of Harned, admitted they were struggling with their votes.

“I mean, you guys are coming with totally opposite positions almost,” said Butler. “And it’s somewhere in the middle, but I don’t know where that’s at.”

Butler remained neutral, but 13 other committee members voted against the bill. Ten voted yes. House Minority Whip Danny Ford, who voted no, says payday lenders are providing a service that others have abandoned.

“The banks, I don’t think, really have an interest in making the smaller loans, or at least the ones that I’ve talked to don’t,” said Ford. “If they did make a smaller loan, they have fees that they can charge to make up for those differences. I think if people are paying the overdraft fees, they end up paying as much, or more percentage, than what we’re talking about here.”

As the standing room only crowd filtered out of the committee room, Representative. Owens told reporters he won’t try to revive the bill this session, but promised he will be back.

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