FRANKFORT — A proposal to eliminate new competition for existing payday lenders cleared the state Senate Tuesday despite concerns by Gov. Steve Beshear and one lawmaker who called it unconstitutional.
House Bill 444 originally required a statewide database to track payday loans, but a Senate committee added the protectionist measure earlier this week. The measure goes back to the House, where lawmakers will consider the 10-year moratorium on new payday lenders.
Beshear, who was a lobbyist for the payday lending industry in 1998, said he "would like to see a strong bill that regulates payday lending in the commonwealth."
He called the original bill, sponsored by Rep. Johnny Bell, D-Glasgow, "a step in the right direction." He said it would eliminate 25 to 30 percent of such loans with the enforcement of existing restrictions. State law says consumers may have only two such loans totaling $500 at a time, but there has never been a way to track that information.
Beshear expressed concern about the moratorium on new payday-lending stores. "I'm going to look at that closer," he said. "Obviously, a good point would be to limit the number of companies in the state that could make those kinds of loans but, at the same time, it bothers me to put a restriction like that in that area."
The Senate approved the bill 32-6.
Sen. Kathy Stein, D-Lexington, said she opposes the bill because it would violate the state and federal Constitutions. "It essentially is a restraint on trade," she said. "It prevents any other folks who otherwise are qualified to engage in that business. It gives exclusive rights to the folks existing now and I think that violates the Constitution."
Sen. Tom Buford, R-Nicholasville, countered by saying it is misleading to suggest the moratorium would last 10 years. He contended the legislation is only in effect until next July, when the current biennium ends, but Stein said "words have meaning, and we put in 10 years."
Before the Senate voted on the bill, several members of the Kentucky Coalition for Responsible Lending held a news conference to urge lawmakers to put an interest rate cap on payday loans similar to the 36 percent cap Congress enacted for military families or the 28 percent Ohio voters approved.
"While we have no doubt that Rep. Johnny Bell's intentions are good, we have serious concerns that this database bill, as it stands, will prevent true reform of payday lending for years to come," said Terry Brooks, executive director of Kentucky Youth Advocates.
"The database doesn't go into effect until 2010 and then we'll have to wait a couple of years to see what Kentucky's data say and in the meantime, more families will fall prey to the debt trap."
The coalition said Kentuckians lose $131 million a year in fees to payday lenders, who charge annual interest rates of as much as 400 percent.
"These products regularly catch working people — or those with a steady source of income such as Social Security or a disability check — in a long-term debt cycle," said John Rosenberg of Prestonsburg, an AARP volunteer.
Tres Watson, a spokesman for the Community Financial Services Association of America, said the coalition should focus more on financial education than criticizing an industry that helps consumers.
Watson also said his group didn't push for the 10-year moratorium. He said the idea came from former state Rep. Bill Strong, R-Hazard, who now lives in Lexington. Strong deals in insurance. His wife, Judy, said Tuesday night that she operates small payday-lending businesses and supports the moratorium.