TOPEKA — A special legislative committee Wednesday backed away from recommending restrictions on payday lenders to reduce what critics call “predatory” loan practices. The industry says the changes would put them out of business and cut access to credit.
Legislators heard testimony Wednesday on reforms to payday lending, which grants borrowers a small, short-term loan with a high annual percentage rate compared to those carried by credit cards or banks. Supporters of the reforms said borrowers end up trapped in debt.
Committee members decided not to add the restrictions over fears of changes to federal regulation. The Consumer Financial Protection Bureau released new rules last week that would add restrictions to payday lenders, according to the New York Times.
The Legislature could still take up the issue during next year’s session.
Some members said they feared placing new restrictions now could have unintended consequences or end up back before the Legislature for fixes to comply with federal rules. Sen. Jeff Longbine, an Emporia Republican, said he was apprehensive about the changes until the federal rules are implemented in 2019.
Others did not want to wait. Sen. Lynn Rogers, a Wichita Democrat, said legislators lived in communities with people who had fallen into payday loan debt.
“If it just means we’re going to keep delaying this and delaying this and delaying this, the unintended consequences are going to happen in each of these people’s lives,” Rogers said.
The bill legislators heard would cap the interest rate on those loans at 36 percent per year. Payday loans can currently carry an annual percentage rate above 200 or even 300 percent. The bill would also limit the maximum monthly payment based on the borrower’s income and cap associated fees. Borrowers could only have one outstanding loan for $500 or less.
Alex Horowitz, a consumer finance researcher with the Pew Charitable Trust, said U.S. borrowers spend more than $30 billion each year on payday loans. He said research on whether consumers were better off in the 15 states that have banned — or effectively banned — the practice was muddled.
“What’s much more clear is that consumers fair better with loan payments that are affordable and prices that are lower,” Horowitz said.
Horowitz said the typical annual percentage rate for a Kansas payday loan was 391 percent, or 15 percent per two weeks the money was borrowed.
“So in dollar terms, somebody who borrows $300 dollars and has it out for five months of the year would repay a total of about $750 to borrow that $300,” Horowitz said.
Claudette Humphrey, director of stabilization services for Catholic Charities of Northern Kansas, said she was once stuck in a payday loan but was able to turn to her family for help. She said many borrowers that come to her for relief are vulnerable because they live on fixed income and don’t have family members that can help.
“I understand that maybe they didn’t pull themselves up by their bootstraps in the way that people think they can, but sometimes you don’t have bootstraps,” Humphrey said.
Humphrey helps oversee the Kansas Loan Pool Project that converts high-interest payday loans into lower-interest, long-term loans for clients.
Ken Williams, president and CEO Catholic Charities of Northeast Kansas, said his organization set up a program to convert high-cost loans to low-interest loans to help people get out of debt, called the Kansas Loan Pool Project. Williams said 45 percent of applicants to the program do not qualify because they don’t have the money to pay back the loan, even at a 6 percent interest rate instead of one above 300 percent.
“So naturally it begs the question for us as these people come to our door — what process did they go through to have the loan application approved at 350-plus percent and for payback periods of 15 to 30 days?”
Members of the industry told legislators the reforms would effectively kill an entire industry and reduce access to credit for those who need a loan.
Julie Townsend, government affairs director, said lender Advance America closed half its centers in Colorado after the state passed payday lending reforms. She said she thought the Kansas bill was more restrictive.
“If half of the industry was eliminated in Colorado, imagine what the impact would be in Kansas with this bill,” Townsend said.
Townsend said less available credit could mean consumers turn to unlicensed lenders, while short-term loans were reliable, transparent and cost effective.
Deputy Banking Commissioner Jennifer Cook said those lenders were a growing problem for regulators to deal with.
Brad Smoot, local counsel for LoanMax, said he thought consumers were happy with the loans and understood the product lenders were offering.
“Clearly there is a substantial need, and people need access,” Smoot said.
Humphrey said the bill would help her clients. She said borrowers who come to her organization for loan relief have sometimes been trapped in a payday loan debt cycle for months or years.