Know the facts before assessing payday loan cap
Cap interest rates on “payday” and title loans at 36 percent – no-brainer, right? That’s what House Bill 267 wants to do. On the surface, this seems like a great idea, but like everything in life, it’s not as simple as it seems.
Let’s just talk about the payday side of HB 267. The way a payday loan works is you show up at one of the 50 or so branch offices in New Hampshire, show them your most recent pay stub, and they will loan you a percentage of that paycheck, usually due back in full within 14 days. Currently there is no limit on what you can be charged for an annual percentage rate (annual percentage rate is all processing fees, application fees and interest rate charged on an annual basis). HB 267 would limit it to 36 percent APR per year, HB 620 would limit the fee to $150 per hundred borrowed. The average loan amount in New Hampshire is around $300, so under HB 620 the borrower would have to pay back $345. Under HB 267 the borrower would pay back $304.14. Needless to say, all the payday loan companies stated that they couldn’t survive on an average of $4.14 per loan.
The New Hampshire Banking Department supplied us with a few facts about payday lenders:
• In 2006, there were 149,836 loans totaling $55,979,409 with an average loan amount of $374. In 2006, there were a total of zero complaints on payday lenders. That’s 149,836 loans with no complaints. Now, The proponents of HB 267 say that the borrowers were too embarrassed to either e-mail, call or write the Banking Department to express their outrage at this lending practice, and this might in fact be the case, but in the same breath the proponents state that when they do away with payday lending these same people will borrow from friends, family members or churches.
If they are too embarrassed to write the Banking Department, you can’t believe that they now would go to friends to borrow this money! Sorry, this just doesn’t make sense.
• The second issue is the term being thrown around – “business plan.” The proponents don’t care for the high return on investment that many of these companies report in their annual filings. They might be right, but they forgot to mention that both St. Mary’s Bank and Service Credit Union’s “business plans” were to lose money in order to grow their base. It is a marketing strategy that they hope will help grow their companies. Smart move for both companies, they can help the local community and add customers at the same time. But both stated that they felt that they would only be able to extend between $1 million and $2 million, and then they would have to re-evaluate their “business plan” in a year or two.
If they did need to charge an application fee of $15 on a $250 loan with an annual interest rate of 18 percent, the APR would be above the 36 percent cap. But wait – did I forget to mention that all banks, credit unions, H&R Block, Beneficial, rent-to-own, etc., were all exempt from this bill? They can charge whatever they want. This bill only targets payday and title lenders.
A memorandum from the Federal Deposit Insurance Corp. stated that because of application or processing fees, banks will not be able to keep below a 36 percent APR cap. The sponsors of this bill all know that if they included everyone, this bill was DEAD ON ARRIVAL, so they only targeted payday and title loans.
• Fact three: It’s been stated that HB 620 was written by the industry. That is a slap in the face of the staff from the Banking Department who spent countless hours trying to craft a compromise bill that they could live with in the event HB 267 didn’t pass. Ninety percent of that bill is language that helps strengthen the department regulation on this industry. The area that they disagree is the $15 per $100 that the commissioner has stated he would not support.
• Final fact: We have heard over and over again that this industry preys on the poorest of the poor, yet the numbers don’t back those statements. I said earlier that you had to show a pay stub to receive a loan. The average income of the borrower is $41,000, but that average doesn’t include spouse, partner or any other income earned in that family. You certainly can’t be on welfare or unemployed to receive these loans.
New Hampshire Legal Assistance has led the charge to do away with these loans. They are basically the lobbying group for the poorest in our state, and they are doing a good job representing their clients, but that is only a fraction of the total loans in the state. So, as a Legislature, we are able to outlaw an industry that provides $55 million annually because, for whatever reason, 20 percent have either been taken advantage of by an unscrupulous percentage of these lenders or have been caught in the cycle of debt and can’t get out. If this is our logic, then we need to ban all mortgages in the state of New Hampshire because it is estimated that 15 percent of them were sold by unscrupulous mortgage lenders or people acquired sub-prime loans and are now in over their heads.
Hey, I am a New Hampshire native. We are a very bright bunch, and I think that the bank commissioner should do his job and regulate this industry. The wild card is, if we do in fact pass HB 267, these loans are still available, but on the Internet, with no chance for regulation.
My understanding is that both the House and Senate have the votes to pass the 36 percent cap. I just hope that each legislator understands the facts and isn’t just voting because of a 30-second sound bite and a knee-jerk reaction.
State Rep. Stephen DeStefano, D-Bow, is vice chair of the House Commerce Committee.