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George Flaggs regrets repayment flaw in lending law

payday lending-sign_rgbThe former chairman of the Mississippi House Banking Committee gave strong support in 2012 to renewal of the state’s payday lending law. The chairman’s enthusiasm even led him to lead the push to remove sunset provisions and make payday lending permanent in Mississippi.

George Flaggs, elected mayor of Vicksburg last year after 26 years in the Legislature, feels differently today. He says he would have fought against the 2012 renewal of the state’s payday lending law had he known it allowed lenders to skirt the 30-day repayment rule.

Flaggs said he saw the 28-30-day repayment period on payday loans as a critical tradeoff to allowing the small-dollar lenders to increase the total amount of a loan and fees from $400 to $500. The new law let the state’s 1,000-plus payday lenders lend the higher amounts but failed to give borrowers the 28 to 30 days to repay the money.

Here is why:

George Flaggs

George Flaggs

The bill as passed allowed for two tiers of loans – those above $250 that would carry a 28-30-day payback period and those below $250 that would set a 14-day repayment. The lower tier loan opened the door, however, for payday lenders to make simultaneous loans at amounts below $250 but totaling nearly $500 in principal and fees and carrying a 14-day payback requirement.

Backed by an opinion from Attorney General Jim Hood, lenders such as All American Check Cashing ceased all tier-two lending and began limiting their lending to tier one increments, typically four $100 loans. State regulators charge that All American took the additional step of illegally rolling over the tier one loans as a way of getting a tier-two payoff on a tier one loan.

In the time leading to renewal of the Mississippi Check Cashers Act, payday lenders had argued against setting the longer repayment period, saying it would diminish their cash flow by having loan money out for extended times.

Flaggs said in an interview last Friday “the intent of the law” was not to allow lenders to use the tier one loan to by-pass the longer repayment period.

“I never intended to allow $500 in loans (and fees) in $100 increments,” he said. “If payday lenders are doing something different, it is incumbent on legislators to tweak the law.”

Flaggs’ successor as House banking chairman, Rep. Henry Zuber III, insisted in a recent interview that he sees no point in making a fix. That’s a job for the federal Consumer Financial Protection Bureau, he said, referring to the 3-year-old watchdog agency created through the Dodd-Frank Wall Street Reform and Consumer Protection Act.

“I’m waiting to see what they do,” Zuber said, and added he expects the CFPB to take full control of payday lending policies and rules across the country, limiting the states to decide whether to allow the lending.

Zuber’s Senate counterpart, Gary Jackson, agreed. The Bureau “will take a fairly strong stance in the near future, perhaps as early as November,” said Jackson, chairman of the Senate Business & Financial Sector Committee, in a recent interview.

Though it has issued a pair of white papers with disturbing findings on payday lending and levied multi-million-dollar fines for payday lending violations, the CFPB has not signaled that new rules are imminent.

A spring 2013 white paper found two-thirds of borrowers in a data sample the agency used took out seven or more loans in a year. “Most of the transactions conducted by consumers with seven or more loans were taken within 14 days of a previous loan being paid back — frequently, the same day as a previous loan was repaid,” authors of the white paper said.

“Similarly, over half of deposit advance users in our sample took out advances totaling over $3,000. This group of deposit advance users tended to be indebted for over 40 percent of the year, with a median break between advance balance episodes of 12 days or less,” the authors said.

A cooling off period between loans is among measures the CFPB is studying.

But it is unclear whether the Bureau is ready to do the rule-setting takeover envisioned by Rep. Zuber and Sen. Jackson.

“The CFPB is considering whether rules governing these products are warranted under CFPB authorities, and if so what types of rules would be appropriate,” CFPB spokesman Sam Gilford said in an email last week. “Rulemaking might include disclosures or address acts or practices in connection with these products.”

A Mississippi member of the CFPB’s advisory board, Hope Enterprise Credit Union CEO Bill Bynum, said he is confident the Bureau will set some new rules. But until it does, legislators should fix the payday lending law glitches that he believes have made poor Mississippians even poorer, Bynum said.

“I think it is unfortunate the Legislature is unwilling to fix the flaws in the current legislation,” he said in an interview last week.

That Mississippi has the highest percentage of payday loan borrowers and the highest cost of borrowing  should spark urgency among lawmakers, Bynum said, bemoaning what he said is the outsized influence the payday lending lobby exerts on legislators.

“It is frustrating to see this allowed,” he said. “While the Legislature is waiting for the CFPB to act, we have thousands of people who are getting into debts they can’t afford to pay. So I hope they will reconsider the urgency of this.”

Bynum’s role on the advisory board during his two-year stint has included briefing members on Mississippi’s payday lending practices and their effects. He wants restrictions put in place that go beyond fixing the glitch that allows the 14-day loan periods on loans and fees up to $500.  Whether achieved through the Legislature or the CFPB, limits should e placed on the number of loans a borrower can have at one time from different lenders, he said.

He further wants an “ability to repay” rule. Such a provision would require lenders to check the financial health of the borrower and attest in issuing the loan that it found the borrower had an ability to repay. Hope Credit, Bynum said, “could not exist if we didn’t have the ability to sit down with the borrower and assess an ability to repay.”

The ability to repay rule could work along the lines of a similar rule the CFPB established for home mortgage loans, according to Bynum.

As a financial sector executive, Bynum said he understands the anxieties lenders have over the CFPB’s stated intentions to closely regulate not only payday lending but also practices involved in activities such as used car loans, student loans and automatic bank drafts.

“You’ve got a lot of issues that are at play here and need attention,” he said. “The Bureau is going to look at all that and try to add some sanity.”



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