Trap lenders, not stressed Kentuckians
Payday loan is a strange business in that it works well when its customers are doing badly.
This is the fundamental reason the Consumer Financial Protection Bureau proposed federal rules to curb the industry, and why it’s illegal in more than a dozen states when most that allow it, such as Kentucky , have laws to limit inconvenience to borrowers.
But the laws are useless if they are not enforced, and in Kentucky, the state agency responsible for this work seems more concerned with getting along with lenders than protecting borrowers, according to a report by John Cheves on Sunday. latest.
In traditional banking, lenders do well when borrowers repay loans with interest.
The payday industry‘s most profitable clients are those who can’t pay off their small loans in two weeks – the next payday – but have to roll them over, racking up huge fees. A Louisville woman told Cheves that she paid $ 1,400 in interest over two years on a $ 400 loan.
The General Assembly passed legislation in 2010 to limit a borrower to two loans, or a maximum of $ 500 at a time, from all payday lenders. To monitor this, lenders must enter borrowers’ social security numbers into a database.
Too often they are mis-entered and borrowers find themselves in debt that impoverishes them while making the payday lender rich.
By law, the Kentucky Department of Financial Institutions can fine payday lenders up to $ 25,000 per violation and arrest repeat offenders.
What Cheves found was that despite repeated violations and written agreements to follow the law, many of Kentucky’s 517 payday lenders continued to violate it. DFI generally imposed a minimum fine of $ 1,000, even for repeat offenders. Very few stores are closed, but DFI ultimately revoked the license of a Louisville store that entered wrong numbers 353 times for just 12 customers in three years.
DFI is part of the Public Protection Cabinet. Secretary David Dickerson must make sure the cabinet lives up to its name by lowering the hammer on repeat offenders.
Payday lenders, often major political contributors, argue that they provide a vital service to people who need small loans for a short period of time, an activity that traditional banks generally avoid.
Many customers agree. Research by the Pew Charitable Trusts has found that borrowers consider a fee of over 300% on an annualized basis to be a reasonable compromise for a two-week loan to resolve an immediate cash shortage.
The challenge is to find a way to continue this service without destroying the finances of already stressed borrowers.
The rules proposed by the CFPB – the first at the federal level – require lenders to assess a borrower’s ability to repay, limit the number of loans in a short period of time, and allow borrowers to repay the balance over time. .
The ability to pay off the principal balance in installments is key to Colorado’s reforms, hailed as one of the few efforts that protect consumers without stifling access to low-value, short-term loans. Colorado allows a six-month repayment period, rather than the next payday scenario, and limits total charges.
A Pew analysis found it was working: just over half of payday stores closed, leaving 235, while the number of borrowers fell only 7%; with double the number of customers, per store loan revenue increased. The average annual interest rate fell from 319% to 115%, and the cost of borrowing $ 500 for six months fell from $ 975 to $ 290.
Kentucky lawmakers – both state and federal – should support CFPB’s efforts to protect Americans in financial difficulty, and the General Assembly should insist that the law it passed to protect vulnerable Kentuckians is being vigorously enforced. .