Idaho Residents File for Bankruptcy, Editoral Blames Lack of Payday Loan Rules
By J.J. CameronPayday Loan Writer
A recent editoral in The Idaho Statesman doesn't blame JUST payday loans for the record number of residesnt filing for bankruptcy. But it doesn't exactly defend these resources, either.
Here it is, paraphrased:
One problem is a state law that allows storefront and online payday loan lenders to charge whatever interest rates they can get from consumers. Politicians cannot legislate common sense and frugality. However, they can and should cap interest rates and protect consumers.
As Idaho has lost good-paying manufacturing jobs and replaced them with lower-paying service jobs, many Idahoans are staring at too much month at the end of the money:
• They filed a record 9,660 bankruptcies in 2003. That means one of every 55 households filed for bankruptcy protection.
• They are failing on their home mortgages in increasing numbers. Foreclosure rates averaged 12.2 per thousand in the first three months of 2004, up from 9.4 in 2000.
• They have used their plastic - a lot. The average household is carrying $10,000 in credit-card debt. It's little wonder why use of cash advance loans has grown in the state.
• They have fueled a demand for payday and auto-title loans - short-term and high-interest transactions. The state had 318 payday and title-loan lenders in June, nearly double the 162 in the state four years earlier.
While payday loans and title loans account for only one-tenth of a percent of Idaho consumer loans, business is growing. Outstanding loans totaled $8.3 million last Dec. 31, up from $7.6 million three years ago.
The laissez-faire Idaho Credit Code, passed in 1983, replaced laws dating back to 1957, which capped interest rates. The Credit Code - billed as a way to "simplify, clarify and modernize" credit laws — bans only "unconscionable" loans. But as House Business Committee Chairman Max Black, R-Boise, points out, the law does not define unconscionable.
A judge must decide if the interest rate is fair, if the no fax cash advance lender was honest and if the borrower was competent to sign on. All that also assumes someone files a lawsuit.
The credit code works for consumers because it allows savvy shoppers to find the best interest rates, said Gavin Gee, director of the state's Department of Finance. Before 1983, lenders pushed to the maximum rates allowed under usury law, rather than offering lower rates to entice business.
"As a general rule, we see that competition does work," Gee said.
But the price of competition - in economic and human terms - comes with payday advances and auto title loans. With no limits in place, these interest rates can exceed 600 percent, and consumers can wind up falling into a whirlpool of debt.
Barbara Toll of Boise, for example, paid $1,551.44 in interest on a $516 car-title loan, while cutting the principal on her loan by less than 10 percent.
Other states have kept payday and title loans at least in the ballpark with credit cards. More than 20 other states cap fast cash loans and title-loan interest rates anywhere from 7 to 25 percent, according to a 2002 report from the Conference of State Bank Supervisors. Idaho legislators have taken only modest steps to protect consumers. The 2003 Legislature passed a payday loans law, pushed by the industry.
The law requires lenders to clearly state fees, both in dollar amounts and annual interest rates; gives a borrower a one-business-day "cooling-off period" to pay back the loan without interest; allows a borrower to roll over a payday loan no more than three times; and caps payday loans at $1,000. The cap is generous since, Gee said, payday loans generally run in the $250 to $300 range.
Black may sponsor a similar bill to regulate title loans during the 2005 legislative session. Again, bill backers are working with the industry on the language. One thing Gee is discussing is a requirement that title loan borrowers receive a brochure that encourages them to look at all their lending options.
The no fax payday loan law has a similar provision: Borrowers are supposed to be told to use payday loans only to cover short-term crises.
But that begs a question:
If these kinds of personal loans are so excessive that consumers should be warned of the consequences, wouldn't the state do more good by simply capping the interest rates? We think so.
