By Iowa City Press-Citizen
You’ll often hear lobbyists from the payday loan industry defend their product as a means of “protecting consumer options.”
Temporarily cash-starved people, they’ll argue, should have the option to take out a short-term loan at a higher percent rate — especially when the interest paid would add up to less than the fee for a bounced check or a late payment.
Having government set artificial limits on this free market, they argue with fist-pounding indignation, would hurt both consumers and businesses.
Perhaps the defenders of this industry would be right in making such statements — and in expressing such indignation — if the majority of payday loans actually were taken out by people who need only a temporary infusion of cash to get through an unexpectedly harsh economic period.
But Iowa Division of Banking statistics show that about half the payday borrowers in Iowa take out 12 loans a year, or one per month. And the Center for Responsible Lending reports that nationally the average payday loan borrower takes out 8.7 payday loans per year. The center also reports that about 60 percent of payday loans go to people with more than 12 transactions per year, and about 24 percent go to people with more than 21 transactions per year.
It would seem that the industry is designed not to help people get back on their feet but to ensure that people stay within a cycle of debt.
Indeed, Daniel Feehan, CEO of Cash America, said during the Jefferies Financial Services Conference in 2007, “You’ve got to get that customer in, work to turn him into a repetitive customer, long-term customer, because that’s really where the profitability is.”
The industry defenders are right when they say that a $15 fee on a two-week, $100 loan is less than the fee a bank may charge for a bounced check or a credit card company for a late payment. But that’s only if the fee is paid right away.
While the industry defenders would like to describe such a fee as being a mere 15 percent, it actually represents closer to a 390 percent annual percentage rate. If the borrower is unable to pay back the loan right away, then that interest rate begins to add up and to start transforming “the cash-strapped” into simply “the trapped.”
The industry defenders say that it’s unfair to talk about annual percentage rates at all. They point out that the much higher interest rates only occur if a borrower recklessly rolls a loan over more than two dozen times in a year. It is this irresponsible behavior, they say, that gets borrowers in trouble, not the loan option itself.
But with more Iowans and other Americans facing financial uncertainty, we’re glad a growing number of cities — including Iowa City, Des Moines, West Des Moines, Clive and Ames — are using their zoning authority to try and limit the number of payday loan businesses that can operate in their city limits.
Those municipal efforts, unfortunately, will have only a small effect on the industry. Iowa City’s ordinance, for example, confines delayed deposit service businesses to community commercial zones and requires a minimum of 1,000 feet of separation between new and existing payday lenders. But it doesn’t affect the businesses already in operation.
It’s time for the Iowa Legislature to address directly the potential and real abuses of this industry on a statewide level.
At the same time, those pushing for more regulation of the industry need to be working equally hard to ensure that enough workable alternatives to payday loans — such as credit-union loans, small consumer loans, emergency-assistance programs and consumer-credit counseling — exist for struggling Iowans.