Committee approves payday loan regulation to reduce effective industry rate

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MONTGOMERY, Alabama — An Alabama House committee on Wednesday approved new restrictions on payday loans that short-term lenders can offer to consumers in need of quick cash.

Republican Rep. Danny Garrett, R-Trussville, said the loans "trap borrowers in a debt cycle" as people renew the loan, or take out new ones when they can't pay off the first. Garrett's legislation would give borrowers more time to repay a loan, taking the window from 14 days to six months. He said that would reduce the effective annual interest rate from more than 456 percent to 36 percent.

"We're trying to get people who are in a debt trap, who are in a cycle of being not able to get out of debt, to not be sucked into this," Garrett said.

The committee approval ended a losing streak for reform advocates who for years have urged the state to crack down on the payday loan industry. Alabama Appleseed's Legal Director Shay Farley said the longer timeframe would give borrowers a "fighting chance to pay the loan."

Payday loans are short-term loans of up to $500. Borrowers pay a fee of up to $17.50 per $100 borrowed.

"These are exactly the kind of reforms that are needed," Farley said. "I asked how many people among us who could repay $587 in 14 days. The answer is you can't."

Payday lenders have argued that their stores provide a service to people who don't have other means to access cash.

Max Wood, a payday store owner and president of Borrow Smart Alabama, said the stores could not afford to stay open under the change and said it was attempt to "eliminate the industry."

"They've tried to shut us down using different ideas and concepts," Wood said.

Garrett said people with poor credit need a way to access to loans. "There needs to be a fair way, a way that doesn't exploit people and a way that doesn't depend on usury," Garrett said.

The bill now goes before the 105-member House of Representatives. The legislation has a bipartisan coalition of more than 30 lawmakers signed on as co-sponsors, but still faces an uncertain outlook.

Rep. Mike Hill, R-Columbiana, noted the possibility of federal regulations on the industry.

"I think we need to think about this longer and decide what is the right direction to go. I'm not saying we don't need some reform," Hill said.

President Barack Obama put a spotlight on the payday loan industry in a visit to Birmingham in March. His visit came as the Consumer Financial Protection Bureau outlined a proposal to put new limits on the industry.

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