Payday Loans Come Under Scrutiny

A switching of bills in the Rhode Island legislature has drawn attention to payday loans, the high-interest, short-term loans that are widely available throughout the state. Recently, the loans have come under fire by community leaders that have bonded together to fight what they believe is a system of legal loan sharking aimed at desperate, poor people.

Currently there are over 30 payday loan centers around Rhode Island.  Most are owned by two national chains; Advance America and Check ‘N Go.  Payday centers have locations in Cranston, Middletown, North Providence, Pawtucket, Johnston, Warwick, West Warwick, Warren, Westerly and Woonsocket.

Because of their short-term status, payday lenders have been given an exemption under RI law to charge up to 260 percent annual interest (APR) on their loans; well above the 36 percent APR cap on most other loans in Rhode Island.

Rhode Island is the only state in the Northeast that permits an interest rate above 36 percent on payday loans.

That could change soon. A grassroots effort by a coalition of state social workers, politicians and national activists are leading the charge to cap interest rates on payday loans with a bill currently being debated in the legislature.

A House bill (H5562) sponsored by Rep. Frank Ferri (D-Warwick) would repeal payday lenders’ special exemption, cap payday loans at a 36 percent annual interest rate and mirror protections put in place nationally for members of the military and their families.  The bill would also ban Rhode Islanders from taking out high-interest payday loans on the internet.

Their work towards this effort was nearly curtailed, however, by some last-minute adaptions to legislation initially aimed at reigning in the rates.

The story begins with Sen. Harold Metts (D-Providence) who had submitted a similar bill to Ferri’s in February, the original S0288. However, on June 9 a modified version of Metts’ original bill, S0288 Sub A, was brought out of committee and placed on the calendar. The modified version allowed payday lenders to lend more money and increase fee percentages on larger loans—basically the exact opposite of what Metts originally submitted.

Despite the changes, the bill was brought out of committee in Metts’ name. Metts said the chairman of the committee, Joshua Miller (D-Cranston, Warwick,) was trying to find a compromise between the community advocates and the payday loan businesses.

“Chairman Miller said he wanted to help the community, but he didn’t want to hurt the businesses either,” said Metts. Metts rescinded the bill after noticing the modifications.

Uriah King the vice president of state policy for the Center for Responsible Lending (CRL,) a national financial advocacy organization, said of the modified bill, “I’ve seen this exact language in six or seven states. This is an Advance America bill. It would be disingenuous to suggest otherwise.”

"To suggest that this is Advance America language is not accurate," said Jamie Fullmer, a spokesperson for Advance America, on Tuesday. He said he had never seen an escalating interest rate tier structure.

King said he was surprised that members of the RI legislature would even consider raising rates, instead of regulating the payday industry. He said normally the interest rates on loans go down as the loan value increases. In the modified bill there would be an 8 percent fee on loans less than $250, but a 12 percent fee on loans between $500 and $750. The current fee is 10 percent, which works out to about 260 percent APR.

“[In Rhode Island], they’ve flipped it on its head. I can’t think of a single case where this is the case. I’ve worked in all 50 states on this,” said King.

Miller could not be reached for comment on Monday.

Metts said the question of how to regulate the payday industry is a complicated one.

“It depends what perspective you look at,” said Metts, who noted that jobs are important in this tough economy and cited a Providence Journal editorial which argued that the loans are simple and straightforward, and that the interest rates merely reflect the high risk taken by the lenders.

Metts said the jobs created by payday loans, however, come at a price for the poor who are being exploited by the industry.

“Providing a service and exploiting someone at the same time isn’t justification for me,” said Metts. “When people are desperate they do foolish things,” Metts said, referring to individuals that get caught up in payday loans after a financial emergency.

For more on the national research on payday lending, including a list of local groups in favor of Ferri's bill, check back with Woonsocket Patch later today.