Payday loan opponents struggle to get a fair hearing
Payday loans are high-interest short-term unsecured small loans that borrowers promise to repay out of their next paycheck, typically two weeks later. Interest rates are typically 300% to 500% per annum, many multiples higher than the exorbitant rates charged by banks on their credit cards. A typical payday borrower takes out payday loans to pay utility bills, to buy a child’s birthday present or to pay for a car repair. Even though payday loans are dangerous financial products, they are nonetheless tempting to people who are financially stressed. The growth of payday lenders in the last decade has been mind-boggling. In many states there are more payday lenders than there are McDonald’s restaurants. In Missouri Payday lenders are even allowed to set up shops in nursing homes.
Missouri’s payday lenders are ferociously fighting a proposed new law that would put some sanity into a system that is often financially ruinous for the poor and working poor. Payday lenders claim that the caps of the proposed new law would put them out of business. Their argument is laughable and their legislative strategy is reprehensible.
Exhibit A is the strategy I witnessed Thursday night, February 18, 2010. On that night, Missouri State Senator Joe Keaveny and State Representative Mary Still jointly held a public hearing at the Carpenter Branch Library in the City of St. Louis City to discuss two identical bills (SB 811 and HB 1508) that would temper the excesses of the payday loan industry in Missouri. Instead of respecting free and open debate and discussion regarding these bills, payday lenders worked hard to shut down meaningful debate by intentionally packing the legislative hearing room with their employees, thereby guaranteeing that A) the presenters and media saw an audience that seemed to favors payday lenders and B) concerned citizens were excluded from the meeting. As discussed further down in this post, payday lenders are also responsible for flooding the State Capitol with lobbyists and corrupting amounts of money.
When I arrived at 7:00 pm, the scheduled starting time, I was refused entry to the meeting room. Instead, I was directed to join about 15 other concerned citizens who had been barred from the meeting room. There simply wasn’t room for us. But then who were those 100 people who had been allowed to attend the meeting? I eventually learned that almost all of them were employees of payday lenders; their employers had arranged for them to pack the room by arriving en masse at 6 pm.
Many of the people excluded from the meeting were eventually allowed to trickle into the meeting, but only as
other people trickled out. I was finally allowed into the meeting at 8 pm, which allowed me to catch the final 30 minutes. In the photo below, almost all of the people plopped into the chairs were payday lender employees (the people standing in the back were concerned citizens). This shameful tactic of filling up the meeting room with biased employees has certainly been used before. [BTW, I suspect either that these employees were being paid to attend or I was witnessing a roomful of FLSA violations].
The irony of using these tactics is that the proposed new bills are actually industry-friendly; they (I’ll sometimes refer to the bills in the singular since they are identical bills, one for each Legislative House) don’t outright ban payday lenders, despite the danger of these loans. Rather, the bills gives payday lenders the ability to charge high interest rates (up to 35%) and “loan setup fees” (up to an additional 5% on a 90 day loan) on their loans. This additional “setup” fee is the equivalent of 20% more interest per annum (for loans paid off in 90 days) and the equivalent of 130% per annum (for those customers who pay off their payday loan in 2 weeks). The new law thus gives payday lenders the ability to earn 55% (35% interest + 20%) on loans that are paid off within 90 days and 165% (35% interest + 130%) on loans that are paid off within 2 weeks. Keep in mind that 20% would be a high rate of interest on a credit card. Consider also that paying 460% interest on a payday loan of $500 is the equivalent of paying 5.8% interest on a loan of $40,000. 
Bottom line – the proposed new law would allow payday lenders to charge between 55% and 165% on the money they lend out. But that’s not good enough for the payday lenders, because they want to continue charging obscene amount of interest, 400% or more. Keep in mind that payday lenders weren’t the first to rake the working poor with high interest loans where the payment was due on the customer’s payday. That tactic was commonly used more than 100 years ago, and we used to call those lenders “loan sharks. We outlawed those types of loans back then, because the financial services industry wasn’t as powerful as it is today.
The proposed new law also would make a second change that the payday lenders probably hate even more than the 35% interest rate cap.
