Is a $1,500 loan worth it if it costs another $1,500 in interest and fees?
That’s what payday lenders would be empowered to charge defaulting consumers in Louisiana if Gov. John Bel Edwards allows Senate Bill 381 to become law.
The legislation would allow lenders to offer installment loans worth up to $1,500 over three to 12 months with an annual interest rate of up to 36% and a monthly “upkeep fee” of up to 13% of the original loan amount. Loans over $400 may also incur a $50 subscription fee.
The proposal, which flew through the Legislature and is now on Edward’s desk, would limit the cost of financing to 100% of the original loan amount – meaning lenders could charge up to $1,500 in fees on a $1,500 loan for a total payback of $3,000.
SB381’s sponsor, Senator Rick Ward, a Port Allen Republican, dubbed the measure the Louisiana Credit Access Loan Act and says the new loan product will help Louisiana residents who live paycheck to paycheck so they can get over making ends meet unexpectedly high spending.
But critics say it’s a predatory product and allowing payday lenders to make larger, longer-term loans with sky-high fees will trap low-income Louisiana residents in debt cycles.
“This harmful law is aimed at the hard-working families of Louisiana who do not deserve to have their scarce assets snatched away by a machine designed to trap them,” said Davante Lewis of the Louisiana Budget Project, serving low- to middle-income residents. “The governor should immediately veto this bill.”
The state’s current payday loan system allows lenders to offer a loan of up to $350, which is due on a borrower’s next payday. The maximum amount a payday lender can make per loan is $55. Ward’s proposal does not replace or reform this system. Instead, a new product is created.
Lenders offering the new product described in SB381 would make most of their money with a monthly “maintenance fee” of up to 13% of the original loan amount.
For a $1,500 loan, that fee would be $195 per month.
Alex Horowitz, a consumer finance researcher at The Pew Charitable Trusts, said he’s never seen a fee this high.
“We find that the bill would expose Louisiana consumers to financial harm, rather than create an affordable credit market like that seen in states that have successfully reformed their payday loan laws,” Horowitz wrote in a letter to Ward et al Edwards.
Kenneth Pickering, who has twice served as Louisiana’s top banking regulator, said he has no idea what the monthly maintenance fee even covers.
“Once a loan is on the books, there’s nothing left to maintain,” he said, adding that the fee was “nothing but more interest.”
Pickering, who represents the Louisiana Finance Association, an organization of more than 600 state lenders, told lawmakers, “That fee, in my opinion, makes this bill a violation of our usury laws in Louisiana.”
“The Good Alternative”
Ward argues that the new loan product is needed for Louisiana residents who cannot obtain a loan of a similar size elsewhere.
“As soon as someone offers an alternative, and I don’t mean an alternative that’s just a pie in the sky, but a viable alternative, I’ll be there to support it, but I haven’t seen it yet,” Ward told his colleagues. “Until then, I think this is the best we have to offer.”
But Stanley Dameron, whom Edwards appointed commissioner for the Office of Financial Institutions, told lawmakers there were many alternatives.
“Some of the people who would apply for these loans might not qualify at your bank, but they certainly would at a credit union or financial firm,” Dameron said.
Jessica Sharon of Pelican State Credit Union told lawmakers it’s a “myth” that there aren’t similar borrowing options for those in financial need. She noted that credit unions were formed specifically to help people of modest means.
“Our goal is to help people who are struggling with their finances, who have low incomes and low credit scores,” Sharon told lawmakers. “Not only are we against (SB381), we also know that we are a good alternative.”
There are 165 credit unions in Louisiana, and 133 cater specifically to low-income demographics, Sharon said, adding that many already offer installment loans without having to charge a 13% monthly maintenance fee.
Ward argues that the legislation would help those whose financial history has prevented them from opening a bank account. But Horowitz, with Pew, said payday loan borrowers need to have a checking account somewhere.
“These aren’t the bankless,” Horowitz said. “You must have a checking account to get a payday loan.”
Horowitz noted that seven of the country’s 12 largest banks have started or recently announced programs to provide small loans to customers.
Local vs. national
Behind Ward’s proposal are two non-government companies that together own dozens of Check-Into-Cash and ACE Cash Express locations across the state.
But not all payday lenders are on board with the bill.
Troy McCullen of the Louisiana Cash Advance Association, which represents Louisiana-based payday lenders, said there was no need for the new product.
“These loans are already available in Louisiana at a fraction of the cost,” McCullen said. “This is greed and arrogance at the highest level.”
McCullen made similar comments four years ago when Ward supported another measure that allowed payday lenders to offer longer-term installment loans. This measure failed at a committee of the House of Representatives.
Pickering of the Louisiana Finance Association said another problem with SB381 is that borrowers only have one day to cancel the loan. He said this is a “very short timeframe for anyone to reconsider.”
He also noted that the 100% cap on fees and interest does not include late fees or insufficient fund fees.
SB381 supporters include Community Choice Financial, an Ohio-based company that owns Check Into Cash, and Populus Financial Group, a Texas-based company that owns ACE Cash Express.
Finance America Business Group, a Louisiana-based company that owns Cash 2 U stores, supports the measure, as does the Louisiana Payday Loan Association, which represents local lenders.
The bill passed the Senate by a vote of 20 to 14 on April 19, just enough to pass. State Senator Gary Smith, whose wife Katherine Smith is a registered lobbyist for Community Choice Financial, was the only Democrat in that first vote to support the measure.
“She never spoke to me about it,” Sen. Smith said in an interview, adding that payday lenders are the “only place some people have to go to get a loan.” You can’t go to a bank. You can’t go to a credit union.”
The measure passed the House of Representatives by a vote of 54 to 35 in May.
The Legislature sent the bill to Edward’s desk on May 19. Under the Louisiana Constitution, the governor has 10 days after receiving a bill to sign it, veto it, or allow it to go into effect without his signature.