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Brett Smiley: No More Delays On Payday Lending Reform

Thursday, June 13, 2013

 

It is time for Rhode Island to join the rest of the states in New England and stop exempting payday lenders from the 36% maximum interest rate that applies to all other lenders in the state.

Payday loans are short-term loans, where a borrower provides a post-dated check and receive cash immediately. These loans are provided at storefronts run by mostly large national companies such as Advanced America and Check N’ Go. These lenders benefit from a special loophole in our state’s laws that allow for interest rates of up to 280%. Sadly this legalized loan sharking forces our most economically vulnerable citizens into a dangerous, hard-to-escape cycle of debt forcing most to take out loan after loan to pay off the interest from the previous loan.

Contrary to the claims of the payday lending industry, this practice not only harms individuals but it also hurts the state’s economy. According to a recent study by The Insight Center for Community Economic Development, the payday loan industry takes a net total of nearly $1.7 million out of the Rhode Island economy. This study factored in all the economic costs and benefits of the industry. Simply put, the outrageous interest payments to out-of-state corporations are a net loss for Rhode Island at a time we need all the growth we can find.

While entrenched interests would lead you to believe otherwise, it is not true that if there are fewer storefront payday lending options people will turn to similar harmful loans available on the internet. A 2012 Pew Charitable Trust survey found no relationship between reforming payday lending and internet payday loan usage. And loans made by unlicensed lenders–including internet payday lenders–are illegal in Rhode Island and can be prosecuted by the Attorney General.

While more alternatives to payday lending need to be developed for low income borrowers, there are already many good options. Nearly nine-out-of-10 state chartered banks offer unsecured personal loans, according to a recent FDIC survey. Among banks that offer small dollar loans–including those in Rhode Island–a large majority provide streamlined underwriting to make a loan decision within 24 hours, a loan repayment period of 90 days or more and, of course, an interest rate of 36 % or less as required by law.

Further, Rhode Island has the benefit of the nationally recognized Capital Good Fund. This innovative and effective social enterprise makes safe, affordable loans to those traditionally shut out of the mainstream banking system. Additionally, they help borrowers build credit, enabling them to access traditional bank products in the future. Payday lenders typically only report defaults (and not timely payments) thereby further trapping their customers and keeping the doors of banks and other sources of credit closed to them.

Borrowers themselves report having other options to meet their economic needs–all much preferable to payday loans–including credit cards, friends, families, churches, relief societies, and savings. In fact, only 1-in-10 borrowers say they chose a payday loan because they had no other option, according to two separate studies funded by the payday lending industry. These same studies report that a majority of borrowers prefer lower rates even if it means reduced access to credit.

Payday lending reform is backed by a broad coalition of organizations in touch with the day-to-day struggles and long-term harm created by this practice including the United Way, the RI State Council of Churches, AARP, and RI AFL-CIO. Legislation to close the loophole for payday lenders–requiring the same 36% annual interest rate that applies to all other lenders–is co-sponsored by large majorities in both houses of the General Assembly. It is time for the legislative leadership in the State Senate and House to allow floor votes on this critical proposed law (H-5019 and S260). It is time we provide the same protections against sky-high interest rates to our most vulnerable citizens that we provide to everybody else. This is the year to put an end to legalized loan-sharking in Rhode Island.

 

Brett Smiley is the Chief Advocate for the Rhode Island Payday Lending Reform Coalition.

 

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