Let us say first of all that we know that our political leaders, for the most part, are trying to do what they believe is in your best interest. We get that. There are some people who, either because of their own poor choices or an unscrupulous lender, have become really tangled up in short term loans. We’re not contesting the need for reasonable measures aimed at helping such people.

Many states, Michigan being a notable example, have safety nets in place by which someone who finds themselves over their heads with payday loans, can pay the loans back over 3 months or more. This limits their ability to use short term loans for a while, but in general it helps them out of a bad situation. These kinds of programs are a good idea.

But what about states that are considering (or already have) eliminating the option of payday loans? What happens to the people of those states if their car breaks down and they don’t have the money to get it fixed? If they have poor credit, this eliminates their best way of getting to work and earning money. And if they can’t do that, how can they fix their credit? While payday loans do end up in a vicious circle for some, not allowing them can also be a bit of a Catch-22.

If you want to keep this option open for yourself and others, you need to let your voice be heard. Call or write your Senators and Congressmen and let them know what you think about it. And when you do, suggest that common sense regulations would make more sense than an outright ban. Otherwise, things could get even tougher for the people who genuinely need an occasional advance on their paycheck.

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A brief history

Colorado politicians have wanted to institute some form of payday loan reform. Representative Mark Ferrandion has been working on payday loan reform since he arrived in the Legislature three years ago.

Critics for the payday loan industry have fought long and hard to keep the current structure. Their arguments have primarily focused around the idea that a payday loan provides credit to people who cannot get a loan from a bank.

Supporters of this new bill have a different view on the payday loan industry. Supporters argued that payday loans feed on the poor with predatory practices. These practices include outlandish percentage rates and encouraging people to take more payday loans to pay off old payday loans.

The consequences of this new bill

Consequences of this new bill are already rolling in. Over the past weekend, at least six payday loan stores closed their doors. Many more payday lenders will follow suit. Many of these sources will close their door before the bill ever becomes law.

The reason for these closures is due to the repayment schedule on new loans. Payday loan stores will need a higher cash flow, as loans will not be turning over on a bi-weekly basis. Now these payday loan sources have to wait six months before the loans bring in money.

It is not all chocolate and gumdrops

House Bill 1351 might sound like a grand idea, but like all laws, there are some gotchas. First off, the current payday loan annual percentage rates can get as high as 400 percent. Under the new law, the maximum percentage rate a loan will have is 45 percent. This might sound great until you add in loan fee. These fees could push charges to over 100 percent of the original loan amount.

Do you remember that higher cash flow need from earlier? Payday loans could start seeing skyrocketing fees to help make up for that lack of cash flow. Payday loans make their money off high interest rates. With a cap on the interest rate, what will happen to the lending fees?

A little new and a little old

This new law goes in effect on August 11, 2010. Any new loans made at that time will have to follow the new interest and time frame guidelines. Any preexisting loans are still free to follow the current laws until next year.

Colorado is taking a bold move to change the payday loan industry. How this will all play out for businesses and consumers has yet to be fully determined. With six businesses already closing up shop and more to follow, is this truly a good deal? Better yet, what will this do to the industry across the country? What state will follow this example? Time will tell.

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Back in February of 2008, the FDIC started a two-year pilot project. The idea was to study affordable small-dollar loan programs through traditional financial institutions. The program involved 30 banks ranging in size from small local banks to national banks.

The idea behind the program is to get these banks to experiment with small-dollar loans. Specifically, these loans would:

• Be for no more than $1,000.
• Have a payback period of between a pay cycle (usually two weeks) and 36 months.
• Charge an annual percentage rate (APR) under 36 percent.
• Include no penalty for prepayment.
• Have fees that are limited to cover actual expenses.
• Include an automatic savings component.

The study has gathered a variety of information in the process of this study. The study would consider whether the bank already offers small-dollar loans, whether it would implement a new program, how big the program would be, how it would be structured and marketed, and how the application process would work.

The study is complete, but all of the data isn’t in yet. You can look at data from the first year of the pilot, however.

If the program shows that these programs can work well for banks, it will likely mean options for people who, up to this point, have had to turn to payday loans. It will also put pressure on payday lenders to offer better terms. It will be interesting to find out the results of the study, and to see whether traditional lenders can really compete and even be profitable under the specific guidelines in the program.

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Wisconsin has recently passed legislation that is designed to combat the high interest loans provided by payday lenders. Proponents of the legislation argue that the high interest rates take advantage of the working poor, and that the rates are predatory.

Opponents of the legislation make their case based on free enterprise. They argue that there is a demand for short-term, low value loans in the marketplace, and that the only way for a company to make a short-term low value loan profitable is to charge what winds up being a high interest rate. They argue that the fees associated with a payday loan are relatively small when compared with fees for things like overdraft protection from a bank or a bounced check fee.

Unfortunately, there is speculation that this legislation won’t really solve the problem, and that the working poor will still be vulnerable to high-interest loans.

The problem with the legislation is that it doesn’t actually include any rate caps. Instead of limiting the fees that the lender can charge, it limits the amount that the borrower can borrow. The legislation caps the size of a payday loan at $1,500 or the equivalent of 35 percent of the family’s monthly income, whichever is lower. It would also allow borrowers to roll over their loan once.

The legislation also tries to reduce the number of payday loan businesses, as well as limit their locations. A payday lender would not be able to operate within 150 feet of a residential area, or within 1500 feet of another payday lender.

Up to this point, Wisconsin has been the only state to not put some regulation or another on their payday lenders. This particular legislation opens that door, although it does it in such a way that it may not have much of a beneficial impact on the folks who are taking out these loans to begin with.

Apparently, there is a new service in the UK where you can actually apply for, and get approved for, a payday loan right from your phone. That’s right. A payday loan. From. Your. Phone.

The lender, Wonga, has published an iPhone application that will let users take out a loan of hundreds of British pounds at a time. Run the app, make the application and within an hour or two you can have money direct deposited into your bank account.

This opens up the imagination to all sorts of scenarios. You’re in an electronics store and you’re shopping for a stereo. You know you’ve only got $400 in your bank account, but you see a stereo that’s $800. You pull out the iPhone, take out the payday loan, and within a couple of hours, you’ve got your loan and your stereo.

One of the downsides to this sort of arrangement, however, is the danger of impaired borrowing. Perhaps you’re out on the town for a night, and have had one too many. No payday lender would give you a loan if you walk in stinking of beer and stale cigarettes. Your iPhone, however, doesn’t know the difference.

Of course, as with everything, there are fees involved.

The fees on these loans, however, aren’t your typical 20% that you might find with a credit card. They’re not even the 300% you might find with a typical payday loan.

The average APR for a loan from Wonga is 2,589%. And, no, that wasn’t a typo. That’s a comma. Two THOUSAND, five hundred and eighty-nine percent.

So, before you jet across the pond to London just so you can use Wonga from your iPhone, thank your lucky stars you live in America. Yes, we have predatory lending. Yes, we have outrageous interest rates for payday loans.

But at least we’re not England.

Photo via Gonzalo Baeza Hernández

According to payday loan info, currently twelve states prohibit payday loans.  Four states permit payday loans but with lower rates and more oversight than normal. Twenty eight states allow payday loans with various regulations for rate caps.  However, Wisconsin is one of six states which do not set a rate cap for its lenders.

Rate Caps Proposed

Currently Wisconsin has over 500 licensed payday lenders. Recently, the state assembly tried to place an interest rate cap of 36% on payday loans. The Assembly speaker Mike Sheridan (D-Janesville) last fall said a proposal to cap the interest rates on payday interest loans “could kill the industry and cost jobs,” as reported in WKOW27 news in Janesville, WI, this week.

Dating a Lobbyist

However, Mr. Sheridan has admitted dating a registered lobbyist for Cincinnati based Check’N Go. The lobbyist, Shanna Wycoff, works for a firm that sells pre-paid debit cards at Check’N Go locations throughout the state.

The executive director of the political watchdog group, Wisconsin Democracy Campaign, questioned whether this dating relationship suggested an appearance of a conflict of interest.

No Improprieties

Sheridan states he keeps his personal life separate from his legislative work. “I would never do anything that would impact the work I do in the state assembly,” said Sheridan. He also said he didn’t accept any gifts from any payday loan lobbyist.

Sheridan suggested that a group of lawmakers were working to put together compromise legislation that would place some controls over payday lenders. “It’s important to get this done, and that’s my number one goal,” he said.

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The town of Starkville finds itself in a situation that’s pretty common in many places during these tough economic times. It seems they’ve seen a quick expansion in the number of payday lenders within the city limits over the past few years. Accordingly, Starkville has decided not to allow any more payday loan businesses into their city.

No New Businesses

Currently, there are around 20 payday loan businesses in Starkville. The Aldermen of Starkville voted unanimously that these kinds of businesses, which provide high interest short term loans, should be denied licenses and certificates of occupancy for doing business for the next year.

This moratorium on new payday lenders is just the first step. It is expected that the aldermen will seek a more permanent solution during the next 12 months that will prevent new payday loan businesses from sprouting up for good.

Hands Off Existing Businesses, for Now

The resolution doesn’t affect existing payday loan businesses. However, it does state that, when an existing business goes out of business, their license and their certificate of occupancy can’t be renewed or transferred. This means that the number of payday loan businesses will, eventually, dwindle as businesses shut down or need to move from their current locations.

Taking More than they Give?

The problem with these businesses, according to one Alderwoman, is that they take more money out of the local economy than they put back in. She said that many of the businesses are part of national chains and that most of the profits funnel elsewhere. In addition, she complained that they tend to crowd out other kinds of businesses.

Not Just Payday Lenders

There are other businesses that fall into this category, along with payday loan businesses. There are “car title loan businesses” which make small short-term loans using the equity in a car as collateral. Banks, however, are still allowed to make that kind of a loan.

Check cashing businesses are affected too. The moratorium sees those as businesses whose primary purpose isn’t banking, and who don’t provide face value of a check.

Outspoken Voices

Some residents did speak out against the moratorium. One man argued that the moratorium hurts the city because it reduces potential property taxes. In addition, he complained that the moratorium goes against the spirit of American free enterprise.

What the Aldermen will do over the next 12 months remains to be seen, but what is certain is that this issue is far from resolved in Starkville.

Photo via NatalieMaynor

Well, controversial mayor of San Francisco, Gavin Newsom, has decided to do something about it. Rather than just gripe about payday loans, San Francisco is trying to offer a real alternative. At the Mission Neighborhood Center on December 17, the Payday Plus SF program was unveiled. The program is designed to offer residents of San Francisco an alternative to payday loans that’s affordable.

This micro-lending program involves six different local credit unions. The idea is to offer low-income folks a way to avoid the payday loans, which can have an annual interest rate of over 400 percent.

The way it works is this: the credit union offers customers loans in amounts from $50 up to $500 maximum. The percentage rate for the loan is a reasonable 18 percent, which is about the same as the average credit card interest rated. Borrowers then have 12 months to pay off the loan.

Newsom recognized the need to get quick cash for expenses that aren’t planned, and he also recognized the need for such businesses. He hopes that, by introducing alternatives, people won’t have to turn to payday lenders.

The city, of course, can’t shut down payday lenders arbitrarily. However, city council members hope that the program will allow families to get out of a cycle of debt, giving them access to “healthy” financial institutions.

Currently, California state law lets payday lenders charge fees of $15 per $100 loaned. This works out to a maximum loan amount of $255, for which the total charge is $300 with fees. Because of the short term of payday loans, most people who take advantage of the service don’t hold the loan for a full year. However, many do renew their loans for several pay periods, creating a situation in which fees grow and grow over time.

There have also been attempts in California to cap interest rates at 36%, which would effectively put an end to most payday loan businesses.

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As it now stands, on July 1, 2010 payday lenders will no longer be able to operate in the state. The laws that allowed these businesses into the state are set to expire at that time, and opponents are working hard to make sure that there are no last-minute legislative changes.

What this means is that, among other things, payday lenders will have to conform to the state’s cap of 36 percent interest on loans. This cap is set by the state’s usury laws, and doesn’t apply to payday lenders.

Critics of the payday loan industry levy a variety of charges against them. For example, they claim that the payday lending industry is flooding Arizona with lobbyists who are trying to get the legislature to do something before the laws expire.

The critics also suggest that the rates charged by payday lenders are unreasonable. The fact of the matter is, however, that many consumers disagree. Because payday loans are typically paid off within a couple of weeks, the Annual Percentage Rate (APR) on these loans can be quite high while the actual fees and interest paid by the consumer aren’t as significant.

Critics also point to a coalition of business organizations, neighborhood leaders and faith-based groups that oppose payday lending. However, the businesses also have their advocates. There are a number of business groups that support the right of payday lenders to operate.

Part of the problem may be the way that Proposition 200 was designed. Instead of just extending the law that allowed payday lenders to come into existence, the proposition would have eased some of the restrictions that do already apply to the payday lenders. It’s possible that a measure seeking to merely renew the law that’s about to expire may have been able to muster enough votes to pass.

If the law expires, Arizona will be one of only a handful of states that have effectively banned payday lenders from their states. As of right now, only three other states ban payday lenders altogether.

Take, for example, the aforementioned town of Kimarnock. Back in March, the town council voted to keep zoning laws in place that block the payday loan industry from expanding within the borders of that town. One of the town council members, Frank Tomlinson, led the charge against the payday loan businesses. “They loan to people who have their backs against the wall, and then they quite frankly stick it to ‘em,” Tomlinson was quoted as saying.

In that instance, many residents of the town supported the move to keep payday lenders out of the town. Statewide anti-poverty advocates from the organization Virginians Against Payday Lending even showed up to the town meeting.

A payday lender, Advance America, had hoped to set up shop in the town. They filed suit against the town, citing the idea of equal protection under the law. The town eventually reversed its decision, unwilling to face costly litigation to defend its zoning decisions in court.

It’s important to understand what a payday loan is if you want to understand the outcry. A payday loan lets a customer borrow against a future paycheck. In exchange, you pay a fee when you pay off the loan. Calculated as an annual rate in the same way that banks and other kinds of lenders do, this can be several hundred percent.

Opponents argue that this is usury, and that it takes advantage of people when they need it the most. However, there are those that believe otherwise. One federal study even suggests that payday loans have a positive overall effect on the borrowers and the local economy where those types of loans are permitted.

Payday loan businesses have been expanding quickly. In Virginia, for example, the Payday Loan Act of 2002 opened the way for the payday loan industry to do business. Today, the payday lending industry in Virginia is a $1.5 billion per year industry, featuring as many as 800 payday lending locations. These locations lend money to borrowers for emergency situations.

Many organizations, from the left-leaning AARP and AFL-CIO to right-leaning Family Foundation have come out against payday loan practices.

Still ,there is a strong and vocal group of people who are standing up for the rights of payday loan businesses, too. The fight isn’t over, and the industry may yet have life left in her to fight.