Bill Would Revive Payday Loans for N.C.
Payday lending was banned in North Carolina more than a decade ago, but a bill sponsored by Moore County's state senator would bring back the controversial practice.
Payday loans are, in effect, cash advances for workers in between paychecks. Borrowers repay the loan or a portion of it at payday. Opponents have long criticized the high interest rates that typically accompany such loans.
State Sen. Jerry Tillman's Senate Bill 89 authorizes "deferred presentment transactions" up to $500 and enables the lender to charge a 15 percent fee per $100 borrowed.
"On a typical loan repayable in two weeks, the annual percentage rate would be more than 300 percent," N.C. Attorney General Roy Cooper, a Democrat, said in a statement. "This is the same rip-off we ran out of our state years ago. These overpriced loans trap borrowers in a cycle of debt many cannot escape.
"Payday lending was a bad idea then, and it's a bad idea now."
Chris Kulka, senior counsel for government affairs at the Center for Responsible Lending in Durham, also opposes SB89.
"We kicked payday lenders out of the state a decade ago," Kulka said. "It makes no economic sense to let them back in."
Tillman, an Archdale Republican who represents Moore and Randolph counties, said the bill has safeguards that would prevent the abuses of the past and keep out financial predators.
"You'll never get the kind of interest the critics are talking about because you have to pay off your loan entirely or you don't get another one," said Tillman, who is Senate majority whip. "If you fail to pay back the loan, you're out of the system forever. This bill has teeth in it."
Previously, borrowers could have multiple loans, often rendering them unable to repay any principal or forcing them to roll over the loans and generating higher interest charges.
Tillman said lenders would be charged a transaction fee, which would help fund a database to keep track of borrowers.
"The database is needed to make sure people don't go down the road and try to get another loan," he said.
Tillman said the legislation also bans "rollover" loans.
"The abuses of the past occurred because of the lack of regulations," he said. "We're doing it right this time. I've had to educate people to undo the past for them to see the merits of my bill.
"We're fine-tuning it right now. It's got several steps to go, but you've got to start somewhere."
Current state law allows a maximum rate of 16 percent on consumer loans under $25,000, except that licensed consumer finance lenders can charge up to 36 percent on loans under $600.
A new poll released Monday by Public Policy Polling found that 73 percent of North Carolinians would like to see current lending limits remain intact, and 72 percent said they would be "less likely" to vote for a legislator that supported SB89.
The bill would not allow payday loans to be made to military personnel or their spouses. Congress banned payday lending to military personnel in 2007.
After a four-year experiment, payday lending was outlawed in North Carolina in 2001. But it wasn't until 2006 that the last payday storefront was finally shut down. North Carolina is one of 12 states that prohibit the practice.
Consumer advocates call payday lending "legalized loan-sharking," in part because the loans and fees can trap consumers in debt as new loans are borrowed to replace the old ones. As a result, cash-poor people enter a cycle of debt in which many pay more in interest than they ever borrowed.
Industry supporters, on the other hand, say payday loans offer a government-regulated option for people with limited credit to get access to money quickly for unexpected needs. They add that the higher costs to borrowers are justified because payday loans are risky.
A study released earlier this month by the nonprofit Pew Charitable Trusts found that just 14 percent of borrowers nationwide can afford to pay off the average payday loan when it comes due.
"These data help explain why most borrowers renew or re-borrow rather than repay their loans in full," the report said. "Borrowers perceive the loans to be a reasonable short-term choice but express surprise and frustration at how long it takes to pay them back."
Other findings in the Pew report include:
n Fifty-eight percent of payday loan borrowers have trouble meeting monthly expenses at least half the time.
n Forty-one percent of borrowers have needed a cash infusion to pay off a payday loan.
n By almost a 3-to-1 margin, borrowers favor more regulation of payday loans.
n Payday loans do not eliminate overdraft risk, and for 27 percent of borrowers, they directly cause checking account overdrafts.
"This experience leaves borrowers torn," the report said. "(They are) grateful to have received respectful customer service and credit when they sought it, but feel taken advantage of by the loan's cost and are frustrated by the difficulty of repayment."
The Community Financial Services Association of America (CFSA), a payday industry trade group, said the report "unfairly paints the entire industry with a broad brush."
"Pew's re-search in this area continues to lack vital context about the broader marketplace and the lack of available credit options, the importance of consumer choice, and why 19 million Americans use payday loans each year," the CFSA said in a statement issued last week. "In our current economy and constricted credit market, it is critical that consumers have the credit options they need to deal with their financial challenges."
Contact Ted M. Natt Jr. at (910) 693-2474 or tnatt@the pilot.com.
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