Wednesday, January 26, 2011
The Mississippi House of Representatives and Senate likely will have to work out a compromise on a bill that allows payday lenders to exceed a statewide cap on annual percentage rates.
Mississippi currently exempts short-term lenders from a 36 percent annual percentage rate cap imposed upon most other lenders. Current law allows them to charge customers $21.95 for every $100 loan, up to a total loan of $400, which includes customer fees.
The Mississippi Department of Banking and Consumer Finance calculates the fee into an annual percentage rate of 572 percent, which opponents of check-cashing services say is too high. The payday-lending exemption expires in 2012, and short-term lending opponents are pushing this year for legislators not to renew the exemption.
To qualify for a $300 payday loan, a customer writes a $365.85 check to the lender--a check that includes three $21.95 fees for three bundled $100 loans. The lender then hands the customer $300 and holds the customer's $365.85 check for the duration of the loan, which usually matches the customer's two-week pay period, before cashing it.
Dan Robinson, president of Financial Services Center and owner of numerous payday-lending outlets, argues the Banking and Consumer Finance Department's APR translation is not an accurate unit of measurement for a loan that is many weeks short of 365 days.
"(APR) is designed for 365 days or longer, and anytime you're talking about a very short amount of days you're talking about an astronomical APR. There's really nothing we can do about that, except extend the number of days (of the loan). (But) we have to show that APR because we do our charges up front," Robinson said. He added that fees charged by banks for overdraft protection--unlike payday-lending fees--kick in after the check has come though.
Both the House and Senate voted to extend the exemption for payday lenders by approving HB 455 last week, but both also extended the repayment period of the loans, depending upon the size of the loan. The House version of HB 455 delays the lender's deposit of a customer's personal check of an amount smaller than $200 up to 21 days. It also delays the lender's deposit of a customer's personal check of an amount larger than $200 for up to 30 days.
The House bill caps the total possible amount of a loan at $500, which must include all fees. Loans under $200 could cost the customer up to $20 per $100 loaned, instead of $21.95, while loans of $201 or more (up to the $500 maximum allowed, including fees) could cost a $21.95 fee per $100 for the customer.
When the bill reached the Senate, however, senators passed an amendment applying the 21-day repayment period before cashing a customer's check to loans of up to $300. The same amendment also delays the lender's deposit of a customer's check for loans of more than $301 or more (again, up to the $500 maximum allowed by the House version) for up to 30 days, as opposed to the House version, which marked the beginning of the second tier at $201.
The Mississippi Department of Banking and Consumer Finance says that extending the duration of these loans brings down the equivalent APR; on a 30-day loan at $21.95 per $100 loaned, the APR is about 267 percent.
"The House and Senate version is roughly the same APR because they did not change the fees or the days, and those are the actual things that juxtapose the APR," said Department of Banking and Consumer Finance Commissioner John Allison.
Allison added that the duration of the loans for both chambers suggest can be rounded to about 30 days. Allison submitted a report to Rep. George Flaggs, D-Vicksburg, last week determining that the 21-day loan offered in the House bill with a $20 lending fee achieves an APR of 347.62 percent.
Robinson said the industry would be "taking a cut on both versions of those bills," but said he was willing to compromise.
"Either way, those are large-dollar amount (loans), and I wasn't as opposed to that because most people who get paid bi-weekly can't qualify for over $300 on a 14-day deal, anyway," Robinson said. "You'd have to be making $800 net on your paycheck to qualify for that with our company."
However, short-term lending opponents complain that neither the House nor Senate version of HB 455 sets a 21-day to 31-day minimum lifespan to the loan.
"(Legislators) enlarged a loophole," said Hope Enterprise Corp. Vice President of Policy Ed Sivak, who is also the founding director of the Mississippi Economic Policy Center, an initiative of Hope Enterprise Corp.
"Say you can make loans up to $300 at a repayment rate of zero to 21 days--up to 21 days--what they can do is make two loans simultaneously. Say you need a $400 payday loan. Technically, you've got one $400 loan that would be subject to the 28-day repayment term. However, the way you can get around that is you can make two $200 loans for 14 days."
Sivak called the practice "loan-splitting," which he said would slightly lower fees, but essentially remove the consumer protection offered by the 28-day repayment period. Legislators need to restrict lenders from loan-splitting in the new bill and create a policing department within state government to monitor the industry for compliance with the law, he said.
Robinson said an attempt by the House or Senate to reduce fees on payday loans too much would make the industry unprofitable and force companies to close their doors.
Biloxi resident and former business owner Ricky Easterling, who lives on a fixed income after breaking his back in a work-related incident five years ago and frequently uses payday lending, said the loan industry in Mississippi does not offer alternatives to payday lenders.
"There are no options for same-day lending in this state. I play golf with the board of directors at my bank, and I still can't get a loan," Easterling said. "Credit scores along the Coast have gone down, and most lending agencies take your credit score into account before offering you a loan."
The Mississippi Economic Policy Center claims the state contains almost 600 businesses offering "small-dollar loans and payday-loan alternatives," but Sivak said no company offers a same-day loan like a payday lender.
"When (payday advocates) talk about (there being) no alternative product that looks and acts like theirs, they're right. There's no place you can go to get money that day without a credit check, but there are places that offer small loans, like credit unions and BankPlus. Our own Hope Credit Union here in Jackson offers low-cost loans to its members."
Sivak pointed out, however, that Hope Credit Union offers the loans as a service to its members, and requires a minimum number of days as a union member before making the loan available. Sivak said small loans with lower rates and longer terms were a better alternative to payday loans, by allowing families to spread out payments over a manageable number of months.