Payday lending is a strange business in that it does well when its customers do badly.
That’s the basic reason the Consumer Financial Protection Bureau has proposed federal rules to curb the industry, and why it’s illegal in over a dozen states while most that allow it, like Kentucky, have laws to limit the downside for borrowers.
But laws are useless unless they are enforced, and in Kentucky the state agency charged with that job seems more concerned about getting along with lenders than protecting borrowers, according to reporting by John Cheves last Sunday.
In traditional banking, lenders do well when borrowers pay back loans with interest.
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The payday industry’s most profitable customers are those who can’t pay off their small loans in two weeks — next payday — but must roll them over, racking up huge fees. A Louisville woman told Cheves she paid $1,400 in interest over two years on a $400 loan.
The General Assembly passed a law in 2010 to limit any one borrower to two loans, or a maximum of $500 at one time, from all payday lenders. To monitor this, lenders must enter the Social Security numbers of borrowers into a database.
All too frequently they’re typed in wrong, and borrowers end up in debt that impoverishes them while enriching the payday lender.
Under the law, the Kentucky Department of Financial Institutions can fine payday lenders up to $25,000 per violation and shut down repeat offenders.
What Cheves found is that, despite repeated violations and written agreements to follow the law, many of Kentucky’s 517 payday lenders continued violating it. DFI typically has assessed the minimum $1,000 fine, even for repeat violators. Very few stores are shut but DFI did finally revoke the license of a Louisville shop that entered wrong numbers an astounding 353 times for only 12 customers in three years.
DFI is part of the Public Protection Cabinet. Secretary David Dickerson must assure the cabinet lives up to its name by lowering the hammer on repeat offenders.
Payday lenders, often large political contributors, argue that they provide a vital service to people who need small loans for a short time, a business traditional banks usually avoid.
Many customers agree. Research by the Pew Charitable Trusts found that borrowers consider fees amounting to over 300 percent on an annualized basis a reasonable trade off for a two-week loan to solve an immediate cash crunch.
The challenge is to find a way to continue that service without destroying the finances of already-stressed borrowers.
The CFPB’s proposed rules — the first ever at the federal level — require lenders to assess a borrower’s ability to repay, limit the number of loans within a short time, and allow borrowers to pay down the balance over time.
The ability to pay down the principal balance in installments is key to reforms in Colorado hailed as one of the few efforts that protect consumers without choking off access to low-dollar, short-term loans. Colorado allows a six-month repayment period, rather than the next-payday scenario and limits total fees.
An analysis by Pew found it worked: Slightly more than half the payday stores closed, leaving 235, while the number of borrowers fell only 7 percent; with double the customers, loan revenue per store increased. The average annual interest rate dropped from 319 percent to 115 percent, and the cost to borrow $500 for six months fell from $975 to $290.
Kentucky lawmakers — both state and federal — should support the CFPB’s efforts to protect financially stressed Americans, and the General Assembly should insist the law it passed to protect vulnerable Kentuckians is vigorously enforced.