For the second time in less than a year, Rep. Frank Ferri (D-Dist. 22, Warwick) has drafted legislation aimed at eliminating an exemption from the state’s usury law that allows payday lenders to charge borrowers triple-digit interest rates.
While the legislation would not outlaw payday loans, it would make them subject to the same usury laws that govern other lenders. Ferri’s intent is to decrease Rhode Island’s average interest rate of 260 percent, to a 36 percent annual rate or lower.
Historically, Rhode Island had a usury cap of 36 percent that prevented the payday loan debt trap, but legislation passed in 2001 exempting loan lenders. According to the Center for Responsible Lending, 17 states, and Washington, D.C., have similar laws capping interest rates, many at 36 percent.
A federal law was passed in 2006 to protect active duty military personnel and their families from payday loan lenders after the Department of Defense determined that payday lender practices were harming military members. The bill also capped interest rates at 36 percent.
But Jaime Fulmer, vice president of Advance America, a payday loan company that has approximately 2,500 locations in 29 states throughout the United States, with about 20 in Rhode Island, including Warwick, Cranston and Johnston, said eliminating the exemption would put them out of business. The company is the largest non-bank provider of cash advance services in the nation.
Additionally, he said applying an annual percentage rate doesn’t make much sense, as the loans must be paid off within two weeks.
“What that does for a two-week loan product is take the fee that we charge, which is $10 per $100 borrowed, and it turns it into $1.38 per $100 borrowed,” Fulmer said. “That breaks it down to about seven and a half cents a day. We think there’s a better or more balanced approach to addressing the concerns that folks have about short-term lending in Rhode Island without eliminating the product altogether.”
Still, Ferri, as well as Margaux Morrisseau, who works for NeighborWorks Blackstone River Valley, a community development non-profit organization in Woonsocket, believes that payday lenders are taking advantage of families who are financially struggling by charging them “ridiculous” interest rates. They think the payday loan industry is preying upon people who can least afford to pay “enormous” interest rates, and fooling them into thinking they are getting a valuable service.
“It’s a problem, and it’s something that needs to be fixed,” said Ferri, who submitted the bill in early January, and anticipates it will be before the House sometime this month. In addition to Ferri, 51 other representatives signed on as co-sponsors, including House Minority Leader Brian C. Newberry (R-Dist. 48, North Smithfield, Burrillville).
“It’s the right thing to do. There’s pushback on it and people say, ‘There are people who need such type of loans.’ Well, they do need such type of loans, but the interest rates are just outrageously high,” Ferri said.
Morrisseau, who is involved with the Rhode Island Payday Lending Reform Coalition, said one of the primary business areas of NeighborWorks is affordable housing. Employees often reach out to residents who are behind on rent to find ways they can help them get back on track to prevent eviction.
In their process, they noticed that many residents who were behind on rent had a payday loan they needed to pay off.
“They were paying the payday loan before they were paying their rent, medical needs, or for their groceries,” she said. “The payday loan is just a death trap.”
Ferri pointed out that Pew Charitable Trusts recently reported that 81 percent of people who use payday loans said they would cut back on personal expenses if payday loans were unavailable to them. The same report notes that in states that restrict payday lenders from operating storefronts or have interest caps low enough to eliminate the industry, 95 of 100 potential customers do not borrow. Only five in 100 use online payday lenders or borrow from another source.
Additionally, the report listed that 69 percent of borrowers said they sought their first payday loan to cover ordinary living expenses, as opposed to paying for an unexpected expense or emergency.
It also states that the average borrower takes out eight loans during the course of a year, averaging $375 each, with a total of $520 in interest annually, and is in debt to payday lenders five months out of the year.
While Ferri feels the Pew report substantiates everything he’s been saying about payday loans, Fulmer said the statistics listed in the report are inconsistent with what Advanced America sees from the 1.5 million customers they serve each year.
He also said it is a bit misleading, as it does not consider other payment options, or penalties, including late fees placed on most credit cards, overdraft fees or fees to cover the cost of a bounced check.
“You have to take a step back and look at the reality that consumers are faced with,” he said “Consumers in Rhode Island often choose our product because the $10 they pay to borrow $100 in two weeks is far less expensive than the $35 they pay in overdraft fees, the $55 in bounced check fees – they pay the fee that the bank charges and the fee the merchant charges. We think consumers ought to have a number of different options when they find themselves in need of credit.”
Former Advance America center manager Steve Martino doesn’t agree. Not only did he work for the company; he was also a customer before joining the staff. During the summer of 2007, he said he was “down and out” and took out a $100 loan.
“It seemed like a great thing,” said Martino, who worked for the location at Armistice Boulevard in Pawtucket from August 2007 to June 2011. “Then, a couple weeks later, I went back and took out $200, then it was $300. Gradually, it got up to a point where I was paying 95 percent of my paycheck to pay it off.”
Then he became unemployed and noticed a “Help Wanted” sign at the center during a visit and applied. They hired him soon after he paid off his loans. He said he didn’t have the best feeling about the company from the beginning, but felt he had no other choice but to take the loans and the job.
“I started noticing things about how they operated and how they treated customers,” he said. “They are taking advantage of people who don’t have good finances, little to no credit, no savings and no money. It’s like dangling a piece of cheese in front of a hungry rat. Before long, you get caught in a vicious cycle you can’t get out of. They don’t offer payment options and when they hire you, they tell you not to offer payment options because that would break that cycle and people wouldn’t come back.”
At first, he enjoyed the job. The first two years weren’t so bad; he needed the job and was learning a lot about finances, he said. But in time, he realized it wasn’t the place for him.
“I didn’t feel right,” said Martino, who now owns and operates a collection agency in Providence. “I felt like I was doing a disservice to people. It was immoral. It was wrong.”
Fulmer said he couldn’t disagree with Martino’s characterization any more. He noted that customer satisfaction is “very high” and that few complaints have been filed.
“I don’t know the motivation behind his crusade to generate media for himself related to this issue, but it really does not take our eye off the fact that it’s important for us to continue to explain our perspectives on these issues and focus on the products we offer to consumers,” said Fulmer. “It’s very simple and straightforward. It’s fully disclosed and transparent. It’s regulated by the state, and at the federal level.”
He went on to say that both sides need to take a step back and try to work together to find reasonable ways to come up with an approach that protects consumers but also allows for a viable market.
As noted, Ferri introduced the bill in 2012. However, it wasn’t voted on, as it never came to the floor. He hopes it will be different this time around.