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Mississippi’s expansion of short-term lending starts July 1

The wall that separated payday ending and car title lenders came down last week with Gov. Phil Bryant’s signing of legislation designed to keep short-term loans available after the U.S. Consumer Financial Protection Bureau enacts sweeping new reforms on June 2 as expected.

Lenders in the business of making short term, low-dollar loans say they expect the Consumer Financial Protection Bureau’s new rules to prohibit the pledging of car titles on loans they make. The law Bryant signed, Sen. Rita Potts Parks’ SB 2409, ensures that loans of the same amount and duration can be made, with the difference being the loans won’t be secured by a car title after the federal government bans that practice.

Car title loans and the payday loans that are available to anyone with a source of income and a bank account have been cousins of sorts. But Mississippi law required stores offering the two lending services be separated by at least a wall. With SB 2409, the walls come down on July 1. Check cashing and payday lenders can offer car title-pledge loans in the same locations.

The new law allows installment loans secured by car titles to extend from two months to 10 months with interest of 25 percent monthly. Loans can range from $500 to $2,500. The annual percentage rate is close to 300 percent, a figure approximately half the APR typically charged by Mississippi’s more than 1,100 payday lending stores.

Borrowers must 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 will be below those charged by payday lenders, the borrower can borrow larger sums and embark on a longer repayment period.

Someone who borrowed $5,000 for 12 months would pay $4,870 in fees to the lender, Whitney Barkley, an attorney with the Center for Responsible Lending, said in a recent interview.

After the May 13 signing, Barkley said the draining of income from low-income Mississippians will worsen. “We are disappointed that, in a state where payday and car title lenders already drain over $500 million from working families, the Legislature would authorize a new type of predatory loan,” she said in an email statement. “Mississippians need real solutions to ending the debt trap, not a loan with an APR of nearly 300 percent.”

The Center for Responsible Lending placed Mississippi third in a ranking of the amount of money fees on payday loans and car title loans drain annually from borrowers, putting payday loan fees at $229 million and car title loan fees at $297 million. Only California, with a total fee drain of $747 million, and Texas, with a drain of $1.6 billion, ranked above Mississippi, the Center for Responsible Lending’s survey showed.

Throw in Illinois and Ohio, and the top five ranked states show a combined fee drain of $3.95 billion, the Center reported.
Ahead of the SB 2409’s passage, Paul Goldman, head of the Financial Service Centers of Mississippi, called car titles the best security for the lender in an industry with significantly high default rates. But the approximately 150 lenders who make up the Financial Service Centers of Mississippi will take the risks on the installment loans even without a vehicle as collateral, he said.

Absent the title loan option, borrowers could end up with nowhere to go for short term other than the costlier payday lender, 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, he noted.

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