Guest MINDSETTER™ Hindley: The Public Option for Payday Lending

Saturday, December 12, 2015

Guest MINDSETTER™ John Hindley

 

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As the General Assembly prepares to return to Smith Hill for the 2016 session, legislative leaders, Governor Raimondo and Treasurer Magaziner need to address the moral problem of payday lending which is being neglected in Rhode Island. The payday lending industry profits off of the financial insecurity of the poor. Over the past three legislative sessions, advocates from nonprofits and faith groups have advocated for a 36% interest rate for payday loans. However, this will not go far enough in protecting those in poverty from the coercive nature of the industry. Legislators and advocates need a bolder and more effective solution. Rhode Island can be a leader in addressing this moral problem of our time by creating a public option for payday loans.

One cannot ignore the need to reform the payday lending industry. The business model is meant to provide access to credit for those who cannot access credit through a banking institution. For those who make between $10,000- $40,000 a year and rely on government assistance, payday loans are the only option to bridge the gap between their income and unexpected expenses such as medical bills, taxes or car repairs. The industry capitalizes and profits off of this vulnerability by offering short-term, single- payment loans at store front locations usually situated in low- income neighborhoods.

In Rhode Island, payday businesses, such as Advance America or Check n’ Go, can charge a triple- digit annualized interest rate up to 260 percent on top of fees. Borrowers in Rhode Island typically have to roll over their payday loans 9 times according to Economic Progress Institute. Such a situation only causes borrowers to be trapped in a cycle of debt that makes them more financially insecure. In this way the industry profits off the immediate needs of low-income people.

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Many states and the federal government have put in place regulations to address the coercive nature of the payday lending industry despite the strong lobbying efforts of the industry. However, these regulations are not strong enough since the industry is able to subtly change their business model in order for regulations to become obsolete. The 36% cap that community leaders are advocating for reflects the cap that was put in place in the Military Lending Act passed by Congress in 2006. However, this piece of legislation failed because when the legislation attempted to define a payday loan, the payday lending companies were able to change their products so the legal definition did not reflect their products which allowed the companies to charge interest rates above the cap.

Since regulations have failed to rein in the industry and protect consumers, legislators in Rhode Island and around the country ought to consider creating a public option for small, short-term loans. Speaker Mattiello, in a May 22 Providence Journal article, voiced his concern that there were ‘no alternatives’ for consumers who rely on payday loans. Rhode Island can offer more alternatives for low-income consumers by creating a government- run lending program.

This can be done through the General Treasurer’s Office. The office can set up storefront locations in urban, low-income areas such as Providence, Pawtucket, Central Falls and Woonsocket or have an online option. The public loan offices can offer small, short- term loans to low income people at substantially lower interest rates. The treasurer’s office would set up a criteria to those who can take out these loans to ensure only low-income individuals can receive them. In addition, the office can have lending counselors on hand to offer financial advice to those who take out a public loan and set up a time table to ensure they are paid off. Unlike the arbitrary time period of two weeks payday lenders give to borrowers to pay off their loans, a the lending counselors can be flexible in determining the length of time borrowers have to pay off their public loan based on their financial situation. These lending counselors will be available free of charge to borrowers.   

Such a program would correct the payday lending industry through increased market competition which will benefit payday consumers. Borrowers will have more options for short- term loans which will incentivize the private payday industry to change their business model to better serve consumers instead of making them more financially insecure. If the payday industry still wants to survive in the market, they will be pressure for it to correct their business model so that it is fairer and less costly for borrowers.

Such a program could receive bipartisan support. It is a government program that benefits low- income individuals but it also promotes responsibility for beneficiaries. In addition, it is not a government take-over of the industry. It promotes free- market competition by offering a public option for those who need small, short- term loans similar to student loans. Regulations fail to reign in the coercive industry. Through increased competition, there is hope for low- income individuals in Rhode Island.  
       

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John Hindley is a political science and economics double major at Providence College. Hindley hails from Smithfield, Rhode Island. He is the college’s nominee for the Harry S. Truman Scholarship.

 

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