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Payday-Loan Fight Goes Bipartisan in States as CFPB Backs Off

Feb. 18, 2020, 10:31 AM

Closing a loophole in Georgia’s usury laws that allows auto title lenders to charge interest rates as high as 300% is neither a Democratic nor Republican issue to State Sen. Randy Robertson.

The Republican lawmaker said bringing auto title lenders under the state’s 60% interest rate cap, which has effectively prevented payday lending from taking hold in the state, is about helping people out of desperate circumstances.

“I saw the role that poverty played in crime. A lot of people were trapped in generational poverty,” Robertson said.

Robertson’s proposed legislation is part of a new wave of state-level efforts to restrict payday, auto title and other small-dollar, short-term, high-cost loans that have emerged as the Trump administration backs off on federal regulation of those lenders. Those efforts are coming in red states, like Nebraska, as well as in those trending blue, like Virginia.

“If the Consumer Financial Protection Bureau isn’t going to do its job, somebody has to,” said Kelly Griffith, executive director of the Southwest Center for Economic Integrity in Arizona, who led an aborted effort at a 2020 ballot initiative to close an auto-title loophole in that state.

Rate Environment

Consumer advocates and lawmakers pushing for state and federal rate caps have targeted 36% to bring it in line with the Military Lending Act, which caps the rate on loans to active duty service members.

“There is very strong bipartisan support to end the debt trap cycle caused by payday lending,” said Lisa Stifler, the director of state policy at the Center for Responsible Lending, which is involved in several state-level efforts to restrict payday lending.

Since 2010, three states capped interest rates at 36%, bringing the total number of states that have effectively banned payday lending to 16 plus Washington, D.C., while a fourth opted to tighten up its regulatory regime.

Arkansas passed a 36% rate cap through a popular ballot measure in 2010. South Dakota did the same in 2016 even as Donald Trump handily carried the state on the way to winning the presidential election.

Colorado voters in 2018 approved a ballot measure capping rates at 36%, going beyond legislative caps on the fees payday and auto title lenders could charge that had left the top rates at an average of 129%.

Ohio put in limits on rates and fees on payday loans in 2018.

At the federal level, bipartisan legislation was introduced in the House and the Senate in November that would set a federal rate cap of 36% for payday loans, in line with current restrictions on lending to members of the armed forces under the MLA.

“If it’s immoral to give this type of loan to people in the military now, how is it moral to give it to anybody else?” Rep. Glenn Grothman (R-Wis.) said when the bill was introduced.

At the same time, the CFPB under Trump-appointed Director Kathy Kraninger is in the process of removing ability-to-repay requirements from a 2017 payday lending rule issued under then-chief Richard Cordray, who was appointed by President Barack Obama.

“There’s always an ebb and flow to it. Obviously, many of the consumer groups felt like their ace in the hole was the CFPB led by Richard Cordray, which was very activist in their approach,” said Jamie Fulmer, the executive vice president for public affairs at Advance America, one of the country’s largest payday lenders.

Efforts to curb payday lending come with a cost to consumers, who may not be able to access cash they need to cover unexpected expenses, Fulmer said.

“All that does is disenfranchise them from the credit that they need,” he said.

First Mover

Virginia has allowed payday and auto title lenders to operate largely unfettered, resulting in interest rates topping 250 percent and one of every eight vehicle title loan borrowers seeing the cars or trucks repossessed, according to October 2019 data from the Pew Charitable Trusts.

Virginia’s legislature, with its new Democratic majorities, is working to change that.

The state’s Senate on Feb. 10 passed legislation that would put new restrictions on rates and fees that lenders can charge on payday and other small-dollar loans in a bipartisan vote. The state’s House of Delegates passed a similar bill in late January.

Once the two houses reconcile their bills, H.B. 789 and S. 421, Gov. Ralph Northam (D) is expected to sign the measure into law.

Rather than imposing a 36 percent interest rate cap, the Virginia legislation would cap interest rates on loans between $500 and $2,500 at 36 percent plus a maintenance fee, with terms on the loans lasting between four and 24 months. The fee would be capped at $25 per month, depending on the size of the loan.

“We know that there are lenders that will do really small loans, from $300, up to bigger loans. We know that they can make money doing this. So we’ll keep access to credit,” said Jay Speer, the executive director of the Virginia Poverty Law Center.

Direct Action

Payday lending opponents in Nebraska opted for a ballot initiative capping interest rates on payday loans at 36 percent in 2020. Current law allows for loans with APRs as high as 459%.

“It’s not really hard to understand why having 400% interest rates on loans isn’t good for the economy or families or the state,” said Aubrey Mancuso, the executive director of Voices for Children in Nebraska and a leader of the ballot initiative coalition.

The Nebraska coalition, Nebraskans for Responsible Lending, began collecting signatures in October with a deadline pending in July.

The coalition has put together an extensive field operation with paid signature collectors and funding from around the country—including from the American Civil Liberties Union, which donated $450,000 in January alone, according to the group’s most recent campaign finance disclosure.

“The outside money is something that’s going to bode well for them in getting on the ballot,” said Paul Landow, a professor at the University of Nebraska-Omaha who studies government and politics in the state.

Fulmer, whose company operates in Nebraska, said that outside money also shows that efforts to rein in payday lending germinate from outsiders that are trying to dictate their views onto other people.

“What you do see is a lot of folks who think they know what’s best for folks,” he said.

The industry has fought off legislative restrictions on high-cost loans before, Landow said. But he said Nebraska’s populist streak could give rate cap backers a shot.

“I think you can clearly make a populist argument in favor of capping rates. If they can play their cards correctly, I think they can go a long way. It’s going to come down to the television commercials,” Landow said.

Closing Loopholes

Georgia’s 60% interest rate cap effectively eliminated payday lending, but auto title products are considered to be pawn transactions rather than loans under state law. That has allowed title lenders to find their way around a provision capping interest rates on loans less than $3,000 at 16 percent.

“The legal loophole really is around the term ‘pawned’. This loophole allows car titles to be pawned, rather than acknowledging that these are loans,” said Berneta Haynes, senior director of policy at Georgia Watch, a consumer group in the state.

Robertson is proposing legislation to close that loophole, citing the federal Military Lending Act’s 36 percent interest rate cap on loans to active duty service members. It’s a big issue in Georgia given the presence there of one of the Army’s largest bases, Fort Benning.

Robertson, a former major in the Muscogee County sheriff’s office and a 31-year law enforcement vet, said that there is a hearing on the bill scheduled for Feb. 20. From there, he’s confident that he can get his colleagues on board.

The auto title industry is relatively small, and their practices are “way out of whack,” Robertson said.

“There’s a lot of kids who are trapped in generational poverty who don’t see the hope. We have to show that segment of our society that we’re here to support them, we’re here to help them up,” Robertson said.

To contact the reporter on this story: Evan Weinberger in New York at eweinberger@bloomberglaw.com

To contact the editors responsible for this story: Bernie Kohn at bkohn@bloomberglaw.com; Michael Ferullo at mferullo@bloomberglaw.com

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