South Dakota is the most recent state to run off its payday loan industry.
In 2016, 75 percent of South Dakota voters overwhelmingly approved a ballot initiative that capped total interest, fees and charges on loans at an annualized percentage rate (APR) of 36 percent.
Evidently a 36 percent APR just doesn’t pencil out for an industry with a revenue model that depends on a daisy chain of fees, late charges, rollovers, fees on the rollovers, interest, more charges and on and on until lenders are paying an APR well into triple digits. Since South Dakota voters said enough, the number of payday lender stores has dropped from more than 180 to a couple dozen, according to the director of the state’s Division of Banking. And the number is expected to dwindle more this year, Bret Afdhal said.
“They pulled their stakes up and left,” Afdhal said.
Fourteen other states and the District of Columbia have similarly capped payday lending APRs, with similar results. Colorado voters get their chance to do the same this November.
If you don’t know how payday lenders capitalize on misfortune and prey on low-income and cash-strapped middle-income people, A) thank goodness, may you never get sucked into the industry’s horrid clutches and the accompanying and costly downward spiral of misery and despair, and B) here is an example from what’s left of the Consumer Financial Protection Bureau (CFPB) to explain:
If you are unable to pay when your loan is due … the payday lender may allow you to pay only the fees due and then the lender extends the due date of your loan. You will then be charged another fee and still owe the entire original balance. Using the above example (a $300 loan), if you pay a renewal or rollover fee of $45 you would still owe the original $300 loan and another $45 fee when the extension is over. That’s a $90 charge for borrowing $300 for just four weeks.
The CFPB reports that as many as 80 percent of payday borrowers roll over loans.
It’s not hard to see how charges and fees can quickly reach an annualized loan cost of 500 percent.
Or 652 percent.
That’s the typical APR charged to Nevada payday loan borrowers, according to the Center for Responsible Lending. It’s also the fifth highest rate in the nation.
An industry built on that sort of return can’t be expected survive on a mere 36 percent. So the industry just cold left South Dakota, and has all but pulled out of the other 14 states that have capped payday loan rates.
Nevada, meantime, does not cap rates charged by payday lenders.
There have been attempts by Nevada lawmakers to rein in the industry over the years. But just as there are famously, or infamously, more payday loan stores than there are McDonalds (in Nevada, by the way, it’s 524 payday lenders, and 155 McDonalds), the Nevada Legislature is awash in payday industry campaign contributions, and lousy with payday loan lobbyists.
The currently fashionable spoon-in-a-flood reform, as advocated in a state audit of the industry earlier this year, appears to be creation of a payday loan database. That’s an excellent idea – if one presumes that the payday loan industry is secured behind a great big beautiful wall and can’t be touched.
Given the combination of industry strength and legislative weakness, it is understandable that calls for reform in Nevada would be Lilliputian. Time and again, Nevada lawmakers of both parties have demonstrated a knee-jerk willingness to put business interests ahead of the public good (often as not while echoing AM talk radio ideology and contending that protecting business is the surest means of protecting the public good). If someone somewhere is counting on the Nevada Legislature to cap payday loan rates, someone somewhere hasn’t been paying attention.
The people most likely to save Nevadans from the payday loan industry are Nevada voters, through a ballot initiative.
Of the states where a cap has been on the ballot, the lowest percentage of voter support was in Arizona. Only 60 percent of voters approved it.
It has been estimated that nearly 70 percent of payday loans are taken to pay for recurring expenses such as rent and utilities, according to an oft-cited Pew Charitable Trusts report. Stats like that can be deployed to lend rhetorical weight to the industry as it cries “But whatever what would people do without us and our invaluable and irreplaceable service?” or words to that effect.
“The experiences of borrowers in payday-free states show that eliminating the payday debt trap does not force consumers to use products that cause greater harm than payday loans,” the Center for Responsible Lending (CRL) said last year in a compilation of research by academics and state governments.
The preponderance of that research finds that the departure of payday lenders had no significant impact on the availability of credit. People turned to multiple alternatives, including mainstream products such as banks and credit cards, but also pawn shops, traditional installment loans, extended payment plans, and a growing number of employer-based alternative loan programs.
What people are not doing is turning from one devil to the next: In states that have ousted predatory, high-fee payday loans, 95 percent of “would-be borrowers” told researchers they would not use payday loans in any form, including online.
The most popular alternative to payday loans? Cutting back expenses to make ends meet.
A lot of these options still leave low- and middle-income people exposed to an economic system that seems designed to hurt the people who are already hurting most.
But the options “are still less harmful than payday borrowing,” the CRL report said.
The report concludes by asserting that the experience in “payday-free states” has benefited millions of consumers, and calls for federal regulation to cap payday loan rates nationwide.
That is not going to happen during the Trump administration. As part of his corrupt jihad against the Consumer Financial Protection Bureau, Office of Management and Budget Director Mick Mulvaney, also the hostile acting director of the CFBP, has dropped several cases against payday lenders.
And under the “Protecting Consumers’ Access to Credit Act,” the Trump administration and congressional Republicans even hope to change federal law to effectively override states that have outlawed usurious payday loans, and let the predators back in to states where they’ve been kicked out.
So much for states’ rights.
That particular specimen of, as Republicans would say, “government overreach” hasn’t been enacted yet. It won’t be, if Democrats gain control of either chamber of Congress in November.
But whatever happens in Washington, states have to look out for themselves. It would be nice to think that elected officials would do that. Past performance indicates it would also be naïve. If residents of Nevada want to get rid of the predatory payday lending industry, we’ll have to do it ourselves.
FYI: Several local organizations are hosting a forum Monday night to discuss the payday and title loan industry, how current practices affect the community, and other topics that may interest advocates and consumers who utilize these short-term, high-interest loans. For more information click here.