TOPEKA — Legislators next year could consider restrictions on short-term lenders to reduce what some call “predatory” loan practices, but the industry says the changes would put them out of business and reduce access to credit.
A special committee of legislators heard testimony Wednesday on reforms that payday lending, which grants borrowers a small, short-term loan with a high annual percentage rate compared to those carried by credit cards or banks. Critics say borrowers end up trapped in debt.
Claudette Humphrey, director of stabilization services for Catholic Charities of Northern Kansas, said she once was stuck in a payday loan but was able to turn to her family for help. She said many borrowers that come to her for relief are vulnerable because they live on fixed income and don’t have family members that can help.
“I understand that maybe they didn’t pull themselves up by their bootstraps in the way that people think they can, but sometimes you don’t have bootstraps,” Humphrey said.
Members of the industry told legislators the reforms would effectively kill an entire industry and reduce access to credit for those who need a loan.
The bill legislators heard would cap the interest rate on those loans at 36 percent per year. Payday loans can carry an annual percentage rate above 200 percent or even 300 percent. The bill also would limit the maximum monthly payment based on the borrower’s income and cap associated fees. Borrowers could only have one outstanding loan for $500 or less.
The committee was expected to make recommendations late Wednesday afternoon.
Julie Townsend, government affairs director, said lender Advance America closed half its centers in Colorado after the state passed payday lending reforms. She said she thought the Kansas bill was more restrictive.
“If half of the industry was eliminated in Colorado, imagine what the impact would be in Kansas with this bill,” Townsend said.
Alex Horowitz, a consumer finance researcher with the Pew Charitable Trust, said U.S. borrowers spend more than $30 billion each year on payday loans. He said research on whether consumers were better off in the 15 states that have banned — or effectively banned — the practice was muddled.
“What’s much more clear is that consumers fair better with loan payments that are affordable and prices that are lower,” Horowitz said.
Horowitz said the typical annual percentage rate for a Kansas payday loan was 391 percent, or 15 percent per two weeks the money was borrowed.
“So in dollar terms, somebody who borrows $300 and has it out for five months of the year would repay a total of about $750 to borrow that $300,” Horowitz said.
Ken Williams, president and CEO Catholic Charities of Northeast Kansas, said his organization set up a program to convert high-cost loans to low-interest loans to help people get out of debt, called the Kansas Loan Pool Project. Williams said 45 percent of applicants to the program do not qualify because they don’t have the money to pay back the loan, even at a 6 percent interest rate instead of one above 300 percent.
“So naturally it begs the question for us as these people come to our door — what process did they go through to have the loan application approved at 350-plus percent and for payback periods of 15 to 30 days?”
Lenders said the restrictions could dry up small-loan, short-term credit or even drive consumers to unlicensed, online lenders. Deputy Banking Commissioner Jennifer Cook said those lenders were a growing problem for regulators to deal with.
Townsend said she thought short-term loans were reliable, transparent and cost effective. She said she thought the bill could eliminate short-term credit.
Brad Smoot, local counsel for LoanMax, said he thought consumers were happy with the loans and understood the product lenders were offering.
“Clearly there is a substantial need, and people need access,” Smoot said.
Humphrey said the bill would help her clients. She said borrowers who come to her organization for loan relief have sometimes been trapped in a payday loan debt cycle for months or years.