Payday lending: Legitimate loans or predatory practice?
COLUMBIA About a year and a half after South Carolina legislators put in place a compromise to rein in the payday lending industry, a battle is brewing between those who want tighter regulation and those who say more control could destroy a business needed by people with few other places to turn.
Pineville Democrat Rep. Joe Jefferson is one who wants the state to re-evaluate what more can be done to protect the poor and middle class from lenders that he thinks charge predatory interest rates and fees. Jefferson said a recent report that revealed a new trend in short-term, high-interest loans that cropped up after the Legislature put new controls on payday loans shows the need for additional government intervention.
Following the 2009 law that limits borrowers to one payday loan at a time, some payday lenders restyled their products into 6- to 12-month loans. In some cases the lenders automatically draw payments from the borrowers' bank accounts once or twice a month.
The loans are controversial because opponents see them as trapping people in a cycle of debt by lending money to people who can't afford to pay back both the loan and interest.
The lenders say they're a resource for those who can't qualify for bank loans but need quick cash and have no other options.
In the year and a half since the new law passed, more than 100 lenders have traded in their payday licenses for new licenses that allow them to make short-term unsecured loans that don't have the same restrictions as the payday loans, according to The Associated Press. Some loans require a car title as collateral.
"If they're going to circumvent the main purpose of the new law, we're going to have to put some tighter restraints on these lending institutions," Jefferson said. He also said that payday lenders and short-term loan providers are not the only financial institutions that need to be held accountable. For example, he said, the state needs to debate strategies to put controls on banks and other traditional lenders, such as credit card companies.
Sue Berkowitz, director of the South Carolina Appleseed Legal Justice Center, is one of the industry's fiercest critics. She said the lenders appeal to people who already are financially stressed.
"If someone is willing to lend you money at a high cost or without looking to see if you have the ability to pay it back, are you getting yourself in more trouble?" Berkowitz said.
She said the Legislature needs to step in with more consumer protections, chief among them, capping the interest rate the lenders charge. The payday loans made to borrowers who exchange post-dated checks for cash typically charge $15 of interest per $100 borrowed every two weeks. That yields an annual interest rate of about 400 percent, far above what banks can charge for typical loans.
"If the mortgage meltdown didn't show us why we need strong regulations, I don't know what would," Berkowitz said.
Some states ban payday lenders, including the neighboring states of North Carolina and Georgia.
Check Into Cash has about 40 payday lending locations in the state and has opened 25 U.S. Money stores in South Carolina to make different kinds of loans that are not under the same restrictions as the payday loans, according to the AP.
Ryan Harris, communications manager for Check Into Cash, said the payday loans and the other short-term loans are different products, meeting different needs.
"It is absolutely not a way to circumvent the law," Harris said. "This is a way to comply with the law and the rules that were set out."
Likewise, Rep. Bill Sandifer, a Seneca Republican and chairman of the House Labor, Commerce and Industry Committee, said the short-term loans that some former payday lenders are now offering have been around for many years. Because there are more lenders in the market does not mean that is a result of the industry trying to circumvent the law, he said.
Sandifer said he has not seen any hard data to indicate the state needs to act. Still, he said, he will meet after the new year with the state Board of Financial Institutions to get the latest information, including whether the industry is guilty of any abuses.
"Everything I've seen indicates to me that the law we put on the books is doing is exactly what is intended to do," Sandifer said.
South Carolina had 533 payday loan locations as of Oct. 31, down from 864 before the law change, according to the AP.
Jamie Fulmer, spokesman for Spartanburg-based Advance America, said the company's revenue is down dramatically, and Advance America has closed nine locations since the new law went into effect. South Carolina's new law puts some of the toughest standards on the industry in the country. He said the new law needs time to work. Critics, he said, are "retreading rhetoric."
"Lost in this discussion is the consumer who uses this product to their satisfaction," Fulmer said. "We have a long track record in South Carolina of satisfied consumers. The marketplace dictates what consumers find to be competitive and cost effective."
The payday loans are available in lieu of higher-cost options, Fulmer said, such as overdraft protection, unregulated interest options and credit card late fees. He further argued that characterizing the interest they charge as 400 percent annually is bogus, because the state's new law limits the number of loans a person can take out. Advance American, which operates 131 South Carolina stores, charges a flat rate of $15 on every $100 borrowed, according to Fulmer.
In addition to limiting borrowers to a single payday loan of up to $550, the new law stops borrowers from paying off one loan with a second. The law also creates a real-time database for the lenders to track borrowers' loans, allows borrowers to cancel a loan within 24 hours and requires a one-day "cooling off" period between loans.
Short-term loans are a "realistic answer" for some people in the state, Sandifer said. Take for an example a single mother, working a minimum-wage job, barely getting by when one of her tires blows out, he said. A short-term loan to buy a new tire might be her only alternative between missing work and losing her job, he said.
Sen. Thomas Alexander, a Walhalla Republican who serves on the Senate committees that screen banking and finance bills, said the state might need to put more oversight on high-interest lenders, but making changes now is a delicate proposition for people who are hurting for cash. And, he said, the fact that lenders in South Carolina have a demand for both payday advances and short-term, secured and unsecured loans, indicates there is a need.
"In this fragile economy, the last thing you want to do is put them in a tailspin, but at the same time you don't want to (allow) them (to be) a victim," Alexander said. "That's the balance we need to come up with."
Reach Yvonne Wenger at 803-926-7855.