Legislation to cut payday loan interest rates praised, scored
Frustrated by interest rates payday lenders charge customers, Representative Frank Ferri recently drafted legislation to lower what he described as “harmful” fees.
While the measure was held for further study, his intent is to decrease Rhode Island’s average interest rate of 260 percent to 36 percent or lower.
“I’m not trying to put them out of business or saying we’re going to outlaw payday lending, but why should they have such an advantage over our banks and credit unions and be allowed to take advantage of people with these high rates?” Ferri said in an interview last week. “People need financial help. They don’t need a payday loan that will push them further into debt.”
Despite Ferri’s intentions, companies making the loans say they couldn’t operate under the legislation and the state would lose a service and people would lose their jobs.
Historically, Rhode Island had a usury cap of 36 percent that prevented the payday loan debt trap. However, legislation was passed in 2001 and exempted loan lenders.
Further, within the last decade, Congress passed a law to protect active duty military personnel from payday loan lenders, which stated they cannot be charged more than 36 percent.
“If Congress determined that this was a threat to our national security, why isn’t that good enough for us in Rhode Island?” Ferri said. “It’s like legalized loan sharking. Banks can’t do it. Credit unions can’t do it. Only these companies can.”
With most payday lenders, borrowed money must be returned in two weeks. If a customer doesn’t pay back the loan on time, said Ferri, the fee is rolled over and a customer often creates a new loan as a result.
Moreover, Ferri feels that payday loan lenders prey on people who are living paycheck to paycheck. He said the average payday lender recycles a loan nine times before it is paid off, with 60 percent of borrowers recycling a loan 12 or more times.
He also said only 2 percent of borrowers pay off their loan in time.
“The business model for payday loan lenders is that people get caught up in a cycle,” Ferri said. “Most of the people who take out these loans need money really fast. They’re in financial trouble and because they apparently can’t go elsewhere for it, it’s difficult for them to pay in two weeks. If they don’t have it now, they are probably not going to have it in two weeks.”
Jaime Fulmer, vice president of Advance America, a payday loan company that has approximately 2,600 locations in 29 states throughout the United States, with 20 in Rhode Island, including Warwick, Cranston and Johnston, said he feels that it’s unfortunate that payday loan lenders are being cast in such a poor light.
He feels that much of the negativity is rooted not only in a misunderstanding of the business, but also a misunderstanding of how consumers make choices when they have short-term financial difficulties.
“We need to take a step back and move away from inflammatory rhetoric and focus on the needs of consumers,” he said. “Our company, which believes very strongly in operating in a regulated environment, provides consumers with credit that meets their needs in a way that is enhancing to their everyday lives.”
If the legislation passes, Fulmer said Advanced America would no longer be able to operate. He feels a 36 percent rate is an unreasonable regulation.
Under a 36 percent APR, Fulmer said fees charged to borrowers would go from $10 per $100 borrowed to $1.38 per $100 borrowed.
“On a two-week loan, that means we’d be able to charge less than 10 cents per day,” he said. “It is clearly a ban on this product [and] it’s a veiled attempt of a backdoor elimination of this industry. No lender would be able to operate at a 36 percentage rate. It would be a boom for unregulated, unlicensed lenders.”
Fulmer went on to say that Advanced America is a “simple, straightforward, fully disclosed and transparent credit product that meets the needs of millions of American consumers because it is cost-competitive compared to the other options available to them. We have extremely high customer satisfaction rates that we measure internally and extremely low complaints filed with state regulators. This is a product consumers like.”
Donna Roche, area manager for Advanced America, agrees. In her five years with the company, she said she frequently hears positive testimony from customers.
Also, she said in today’s economy, it’s no longer a want; it’s a need.
“We have customers that can no longer afford to feed their families,” said Roche. “They’re on unemployment and only capturing part of their pay. At the end of the day, I’m proud of what I do because a person comes in with a situation and they leave with a smile on their face. What better job could you have than to make somebody happy?”
Roche also said with businesses closing due to the state of the economy, it doesn’t make sense to shut down more businesses.
“Are they going to devastate the rest of the economy?” Roche said. “We all support Rhode Island. We live here.”
In a recent statewide poll taken by the Rhode Island Coalition for Payday Reform, the results of which were released earlier this month at a roundtable discussion hosted by State Treasurer Gina Raimondo and Providence Mayor Angel Taveras at the West Elmwood Housing Development Corp. in Providence, 76 percent of people supported lowering the maximum rate from 260 percent to 36 percent.
Eleven percent of people polled opposed making the change, while 14 percent reported that they were unsure of their feelings regarding the issue.
When asked if they would still support the legislation even if payday loaners were to close some of their locations and lay off employees as opposed to lending at lower rates, 74 percent still favored it, 15 percent did not and 12 percent weren’t sure.
Additionally, results showed that those polled would be more likely to vote for legislators that supported lowering rates. In fact, 63 percent said they would be more likely to, while 17 percent said they would less likely support legislation in favor of the bill. Twenty percent were unsure.
Of those polled, 54 percent were female and 46 percent were male. Also, 34 percent were Democrats, 13 percent Republicans, 53 percent listed themselves as independents or “other.” A majority of those polled (85 percent) were Caucasian, while 15 percent were listed as “other.”
Six percent answered yes when asked if they ever borrowed from a payday lender, and 88 percent said no. Another six percent did not wish to disclose whether they did or not.