By TED CARTER
The Mississippi Senate approved installment-loan legislation Wednesday that supporters say creates options for cash-strapped borrowers but has opponents worrying it expands predatory lending.
The bill, SB2409, won passage on a 38-11 vote.
Supporters of legislation authored by Sen. Rita Potts Parks, chairwoman of the Business and Financial Institutions Committee, tout it as a way to ensure short-term loans are available after the U.S. Consumer Financial Protection Bureau enacts sweeping new reforms, perhaps as early as this spring.
Whitney Barkley of the Center for Responsible Lending said her review of Parks’ bill shows it to be another way to trap Mississippians in a cycle of debt. Similar bills are going through State Houses across the country, she said.
“This is the national payday loan industry trying to create this installment loan product with payday loan prices,” said Barkley, a policy counsel with the center and former staff attorney with the Mississippi Center for Justice.
“More people will get caught in a debt trap,” she said. “They are trying to shop this as a safe product.”
Ed Sivak, vice president of policy for Hope Enterprise, parent of Hope Federal Credit Union, said the prices allowed on the proposed installment loans are far too high. Structuring of the loans could be improved as well, said Sivak, whose Jackson-based organization strives to bring financial services to unbanked communities in Mississippi, Arkansas, Louisiana and Tennessee..
One element of Parks’ bill is intended to make lending more convenient by allowing check cashing and payday lenders to offer car title-pledge loans in the same locations. Today, the operations must be separated by at least a wall.
It also allows installment loans secured by car titles to extend from two months to 10 months with interest of 25 percent assessed monthly. Loans could range from $500 to $2,500.
The annual percentage rate would be 300 percent, a figure approximately half of the APR typically charged by Mississippi’s more than 1,000 payday lending stores. Borrowers would have to pay down at least 10 percent of the loan each month after making the first monthly payment, according to the Financial Service Centers of Mississippi, a trade group for check cashing stores and title-pledge lenders.
Even though fees would be below those charged by payday lenders, the borrower would be borrowing larger sums and embarking on a longer repayment period, said Barkley of the Center for Responsible Lending. Someone who borrowed $5,000 for 12 months would pay $4,870 in fees to the lender, she said.
At 300 percent APR, “I’m not sure it makes that big a difference,” Barkley said of offering borrowing costs lower than payday lenders.
The new rules from the CFPB will outlaw vehicle titles as security on installment loans. With SB2406, lenders could continue making the loans but would be unable to secure them with car titles.
Car titles are the best security for the lender in an industry with significantly high default rates, said Paul Goldman, head of the Financial Service Centers of Mississippi.
Goldman said the approximately 150 lenders who make up the Financial Service Centers of Mississippi are willing to take the risks on the installment loans even without vehicle as collateral. Without Parks’ bill, borrowers could end up with nowhere to go for short term, low-dollar loans, he said.
“When payday loans and title loans go away, there is nothing else out there” for Mississippians in need of a short-term loan, Goldman said. “This will allow them to come in without a credit check and get a few hundred dollars.”
Goldman said title-pledge shops take on even further risks because unlike payday lenders, they can’t access a borrower’s bank account through payments from a post-dated check.
While supporters of Parks’ bill claim the Consumer Financial Protection Bureau is intent on putting payday lenders out of business, such an outcome is far from certain. The Bureau’s main goal through its reforms is to limit the frequency of payday loans to chronic borrowers and to ensure borrowers can repay the loans, the CFPB says, and notes it has no control over fees and interest rates.
“The ability-to-repay concept has been employed by Congress and federal regulators in other markets to protect consumers from unaffordable loans,” a Bureau spokesman said in an email.
Addressing the frequency of payday loans, the CFPB said an analysis in 2014 showed that four out of five such loans are renewed or rolled over within 14 days. Most borrowers end up paying more in fees than the loan amount, the CFPB said.
In Mississippi, payday lending generated $261 million in 2013, according to an analysis by the Center for Responsible Lending.
“Seventy-five percent of their fees come from borrowers who have 10 or more payday loans out in a year,” the Center’s Barkley said.
Sen. Parks said in a published interview the very size of Mississippi’s payday lending and title-loan industry make it important to save. “The payday loan and title loan business in our state is a billion dollar industry,” she said. “We need to keep the market open because so many Mississippians need these loan options, and so many rely on payday loans and titles loan when emergencies happen.”
BEFORE YOU GO…
… we’d like to ask for your support. More people are reading the Mississippi Business Journal than ever before, but advertising revenues for all conventional media are falling fast. Unlike many, we do not use a pay wall, because we want to continue providing Mississippi’s most comprehensive business news each and every day. But that takes time, money and hard work. We do it because it is important to us … and equally important to you, if you value the flow of trustworthy news and information which have always kept America strong and free for more than 200 years.
If those who read our content will help fund it, we can continue to bring you the very best in news and information. Please consider joining us as a valued member, or if you prefer, make a one-time contribution.Click for more info