PROVIDENCE – You have probably received e-mails telling you that $1,000 or more is available to you today by making a phone call or clicking an Internet link. If you live in a low-income neighborhood, there may be a storefront nearby where similar “short-term” loans are offered.
So-called “payday lenders” offer you quick cash for emergencies or to help you make ends meet until your next paycheck. But that money comes at a high price.
Opponents of the practice claim it preys upon low-income people with few other options to borrow money in a hurry and they call the interest rate – calculated at up to 260 percent annually – “unconscionable.”
In many cases, customers must leave a check from their bank to cover the amount borrowed with interest – as much as $10 per $100 borrowed – that the company can cash when the loan is due, usually a two-week timeframe. If customers don’t have the money to pay it, they have to renew the loan, putting them deeper in debt.
The companies that do such lending say the high interest rates are needed because, among other things, there is a high rate of default on these unsecured loans.
Mayors Leo Fontaine of Woonsocket and James Diossa of Central Falls joined mayors from other communities, state legislators and advocates for the poor in calling on the General Assembly to pass legislation, introduced by Rep. Frank Ferri in the House and Sen. Juan Pichardo in the Senate, that would cap the interest rate payday lenders can charge to the same 36 percent rate that is the maximum that can be charged by banks, credit unions and credit card issuers.
In 2002, Ferri told The Call, the General Assembly exempted these short-term lenders from the state’s usury laws, which limit interest charges at 36 percent. At that time, he said, many of them charged 15 percent interest on the two-week loan or 400 percent annually. In 2010, he said, Woonsocket Rep. Lisa Baldelli Hunt sponsored legislation bringing that down to 10 percent, or 260 percent annually.
“As mayor of one cities that has been hardest hit by this economy,” Fontaine said at a Statehouse press conference on Wednesday. “I see first-hand many of the people who are struggling – the ones who are being victimized by these predatory practices by these organizations that are charging such exorbitant rates.
“It is about time that reform take place,” Fontaine added. “We look at so much of the work that has done to help people, yet this practice sits out there as a glaring example of victimization of people who need the help the most.
A 260 percent interest rate “ is almost unfathomable to consider,” the mayor continued. “But in states that have enacted strong legal protections, the result is a large net decrease in payday loan usage. Borrowers are not driven to seek payday loans online or from other sources.
“The only proven solution to the payday loan debt trap is a rate cap at or about 36 percent,” he said. Attempts in other states to modify the payday loans with strategies such as bans on loan renewals, “have some of the worst debt trap statistics in the country.
Fontaine said 17 states, the District of Columbia and Congress (specifically for members of the armed services) cap lending rates at or about 36 percent. “Rhode Island is the only state in the northeast that allows these loans to collect triple-digit interest rates.” Polls in North Carolina showed that three-quarters of low-to-middle-income families were unaffected by a ban on payday lending, the mayor said, adding, “of the remaining quarter, 2-1 said the departure of payday lending in the state was a positive development in their lives.”
Fontaine said he sees people in his office telling him they can’t afford to pay their water bills, they can’t afford to pay their car tax, “and when you delve in deeper to their problems, these are the people who are getting sucked in to these debt traps.”
“We don’t know what this does to those who can’t afford to pay these high interest rates,” Diossa said. “We must stand together and I, as an elected official, stand here looking out for the best interests of the
residents of the city of Central Falls. I am very happy this bill has the support it has today, It is the right thing to do. Let’s do the hard work and support it.”
Jamie Fulmer, senior vice president if public affairs for Advance America, which runs 19 of the 27 payday loan operations in Rhode Island, sees the situation differently.\
“First of all,” Fulmer said, the payday loan opponents “are not pushing for reform of the industry, they are pushing for the elimination of the industry.”
He said the 260 percent interest rate often cited by the opponents is “an implied, annualized percentage rate” which assumes a customer takes out a two-week loan 26 times a year. He said Rhode Island already has “the lowest fees of any state” in the competitive marketplace. To require lower rates, he said, “is to ignore the realities of the market place. Customers would rather pay less than $3.60 for a gallon of gas,” but that is not where the market is at this point.
Fulmer said that with a “fair valuation,” the calculation would be compared to the annualized rate for overdraft charges and other fees charged by banks. He said his company offers, “simple, straightforward, transparent, cost-competitive options to meet customers’ needs.”
“From a consumer perspective,” he said, the loans “meets the needs of thousands of people in Rhode Island and millions nationwide.” He added that company surveys show that customers are “overwhelmingly satisfied,” with only one complaint made in all the years the company has been doing business in the state. In many states, he said, the customers’ only option is online sites that are not regulated at all.
“Price fixing doesn’t work in any market,” Fulmer asserts.
.He said the opposition to payday loans come from “folks who think they understand what is best for people. They don’t think people should have access to a regulated form of credit.”