By Anne Marie Regan and Lisa Gabbard
Kentucky's new payday lending database is proving that too many consumers are caught in an endless cycle of debt and that a 36 percent rate cap is long overdue. The Herald-Leader's recent editorial got it right that payday loans create "a perpetual debt machine that grabs borrowers and sucks them in."
What's new: Information from the database supports the push for a common sense 36 percent cap. Lawmakers told consumers and their advocates, in 2009 and again in 2010, to "wait and see how the database works." All the while, payday lenders have continued making loans at up to 400 percent annual interest to consumers desperate for cash to make ends meet.
Kentucky's database went live in April and has been quietly gathering hard data and adding up the millions of dollars borrowed and fees paid at the 600-plus payday lending storefronts across the state. What the new database confirms is a disturbing and persistent debt trap for consumers that parallels patterns of long-term borrowing in other states. These patterns show that repeat borrowing is the rule, rather than the exception for the payday industry.
The average borrower in Kentucky has taken out 8.6 transactions since January, and 83 percent of payday loan revenues have been generated by borrowers with five or more transactions. Borrowers typically cannot repay in 14 days and end up taking out loan after loan. As a result, the typical borrower will pay $439.50 in fees alone on the average loan amount of $310. The database also confirms how much Kentucky consumers are paying in fees (more than $80 million this year so far), with much of it leaving our local economies and going to out-of- state companies.
While the database is a useful tool for regulators and a first step in enforcing existing state law, it does nothing to help consumers escape the debt trap or lower the 400 percent interest rates. Other states have taken action to do this, and Kentucky should, too. Seventeen other states (most recently Montana) have capped interest at around 36 percent or never legalized payday lending. In 2006, the Department of Defense pushed Congress to pass a law limiting annual interest on payday loans made to military families to 36 percent.
One recent bright spot in this long debate is the Attorney General's Consumer Advisory Council. It held a series of public hearings this fall and gathered comment on payday loans. What it heard from consumers and their advocates was clear: Waiting for a 36 percent cap on payday loans is costing consumers, their families, local economies and Kentucky too much.
After deliberating, the Council has recommended that the 2011 General Assembly impose a 36 percent interest rate cap on payday lending.
Even with Kentucky's new database, state law is not protecting consumers from exploitative, high-interest (400 percent APR) loans and the cycle of debt. Now that the database is capturing data about the harmful effects of payday loans, it's up to the legislature to use this information to spring consumers from this debt trap. The only proven solution is to cap these loans at 36 percent.
More information is at the Kentucky Coalition for Responsible Lending's blog at http://kyresponsiblelending.wordpress.com/
Anne Marie Regan and Lisa Gabbard are co-chairs of the Kentucky Coalition for Responsible Lending.