Legislators seek interest cap on payday loans
New Hampshire has become the magnet in New England for short-term high-interest lenders, and state lawmakers are becoming increasingly uneasy about it.
Since the Legislature eliminated interest-rate caps in 1999, some 42 payday and title loan lenders have sprung up around the state.
For the industry, this is proof that they are fulfilling a need.
“Thousands of New Hampshire citizens have come to value this as a choice when they have need of short-term financial options,” said Jamie Fulmer, spokesperson for South Carolina-based Advance America, the largest short-term lender in the state and nation. “The payday advance is an alternative that the consumers trust.”
The company, listed on the New York Stock Exchange under the symbol AEA, each year reaps more than half a billion dollars in fees and interest charged to customers out of some 2,750 storefronts nationwide, including 20 in New Hampshire.
Critics, however, have long charged that such lenders are taking advantage of a need, not fulfilling it.
“They are sucking the last drop of blood out of a dying corpse,” said Rep. Neal Kurk, R-Weare, who is proposing a bill that would reinstate the interest-rate caps of 1999. “It was a bad idea when we did it, and it has not improved with age.”
The short-term, high-interest loan industry in New Hampshire comes in two forms: a title loan for which borrowers actually gives the lender the title of their car as collateral, and a payday loan, for which a borrower agrees to write a posted-dated check as security.
The industry claims that the cost of a short-term loan is a fee — and less hefty than the fees charged by banks for bouncing checks or credit card late fees. Critics, however, say that many of these short-term loans are rolled over and become long-term loans, and that these fees actually translate into interest rates that can run as high as 500 percent.
State and federal regulators have required loan companies to disclose these rates, much to the consternation of the industry.
“The APR is a ridiculous calculation,” said Steve Schlein, a spokesperson for Community Financial Services Association of America.
Ridiculous or not, federal and state officials are increasingly looking to cap the APR at a much lower level than the short-term loan industry can live with.
At the national level, Congress has passed a law capping the rate at 36 percent for military personnel. At the same time, federal regulators have closed a loophole that permitted short-term lenders to circumvent state interest caps by partnering with local banks. The Federal Deposit Insurance Corp. has cracked down on the practice, forcing companies like Advance America to pull out of several states, including Pennsylvania, and slowing its growth.
Such a rule change doesn’t affect New Hampshire because there is no limit on interest rates. Instead of capping rates and effectively driving the industry out of New Hampshire, the state has chosen to license the lenders and regulate them, making sure that they follow disclosure regulations.
Several lawmakers are seeking to go beyond those restrictions.
David Smith, D-Nashua, is proposing a bill that would limit interest rates statewide to 36 percent. Smith, a retired commercial loan officer (and Republican until two years ago), said that he became aware of the problem back in 1999, when the cap was just being lifted in New Hampshire. That’s when his son, who was at a military base in Fort Benning, Ga., said that without $850, a title loan company was going to take his car.
“I told him that next time you need to come to the family first,” he said.
There are other alternatives as well, but those who fall victim to the short-term loan industry become so mired in debt that sometimes these alternatives are no longer available, argued Smith.
Smith’s bill is the most moderate of the three. Michael Kaelin, D-Lyndeborough, would establish a “criminal usury rate” of 30 percent, based on the current cap in effect in New Jersey. He compared the short-term industry to loan sharks, “who are kicking people when they are down. It may seem like they are helping them in the short term. In the long term, it is really hurting them.”
Kurk’s bill – by bringing back the old limits — would cap the rate at an even a lower rate: 2 percent a month.
Such bills have been proposed before, said Kurk, but this time they have a better chance to succeed because “the Legislature is now controlled by Democrats, and this is one position that I agree with them. Unfettered business is doing more damage to the economy.”
In addition, there is a larger nationwide movement underway to impose the 36 percent cap.
In New Hampshire, this banner is being carried by Sarah Mattson, a New Hampshire Legal Assistance attorney who received a grant to work on payday lending issues. Mattson is seeking to reach out to agencies that have clients dealing with such loans, including Paul Martineau, the Manchester welfare commissioner.
“We do have clients who are caught in the downward spiral of payday loans,” said Martineau. “They should not be forced to pay these interest rates. They think it is temporary, until something else happens and they get trapped in these endless rollovers. Something needs to be done.”
Mattson also is working with credit unions to create alternatives and she is building a coalition to cap the interest rate.
“I like 36 percent,” she said. “It is a good model for state legislation at this time. It sounds high, when people are paying 18 or 20 percent on a credit card.”
Payday lenders don’t just dislike 36 percent, they argue that it will drive them out of business, and take a way a resource for those in need of short-term cash.
“Thirty-six percent would not allow us to break even,” said Fulmer of Advance America. “On a $100 loan, that breaks down to less than 10 cents a day. We can’t operate on 10 cents a day. It’s a prohibition of the industry.”
Mattson contends that other lenders make do on much less than 36 percent.
“The genuinely creditworthy can access loans made by responsible lenders,” she said. “Those who are unable to obtain credit from any traditional source access the safety net of social services, including government-sponsored benefits programs, nonprofit organizations and faith-based organizations. Unfortunately, the debt trap that payday lending creates can postpone and worsen borrowers’ financial distress.”