The payday loan industry reported spending almost $120,000 in the first eight months of 2010 lobbying Kentucky's legislature.
Advocates for the payday loan industry's prey, er, customers, don't have that kind of money to get out their message.
But they do have some compelling facts, if only lawmakers can turn down the volume of special-interest money long enough to listen.
The Consumers' Advisory Council, a body created by the legislature to advise it, is urging lawmakers who convene today to impose a 36 percent interest rate cap on payday lenders.
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The council, which held three public hearings last fall, listened to payday lenders, as well. One of the industry's most persuasive arguments is that the exorbitant fees charged by banks on overdrafts and for services are unregulated and that payday loans are a better deal than paying the bank fees.
But, after considering the industry's case, the consumers' council decided it was in Kentucky's best interest to join 15 other states that have enacted a 36 percent cap on payday loans, the same cap that Congress imposed for the protection of military service members.
Back in 1998, when the General Assembly first regulated payday lenders, one of the main worries was that consumers were being "rolled over" from one high interest loan to the next and incurring insurmountable debt that would lead to bankruptcy.
To address this concern, the legislature limited customers to no more than two loans totaling $500 in a 14-day period.
But the two-loan limit isn't working, based on information from an electronic database of payday lenders authorized by the legislature last year.
"The data show that the average consumer is trapped in a debt cycle," wrote Todd E. Leatherman, executive director of the state Office of Consumer Protection, in a letter on behalf of the advisory council to House Speaker Greg Stumbo and Senate President David Williams.
"According to the data, 83 percent of payday loans went to consumers who took out five or more loans at an APR of 391 percent during a five-month period. On a typical loan of $255, this amounts to $90 in fees per month. What is offered to a consumer as a short-term, stopgap loan, often becomes an insurmountable financial burden due to the high interest rate of this product," Leatherman wrote.
A study released in October by economists at Vanderbilt University and the University of Pennsylvania found payday borrowers are twice as likely to declare bankruptcy as other similarly situated consumers.
Short of imposing a 36 percent cap, the council recommends other protections, such as additional consumer disclosure, allowing extended payment plans and imposing a cooling off period between loans.
But based on experience in other states, the council cautions, such measures appear to be "ineffective at addressing the most important harm created by payday lending, which is consumers' inability to get out of a debt cycle caused by the high interest rates of payday loans."