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Volume #77, Report #21, Article #06 --Thursday, January 31, 2008 HOUSE PANEL EXPLORES ALTERNATIVES TO CAPPING PAYDAY LOAN INTEREST RATES Seemingly hesitant to cap interest rates on payday loans, members of a House panel questioned proponents of an industry-backed bill on Thursday about ways lawmakers could expand consumers' options for small loans. The House Financial Institutions, Real Estate & Securities Committee heard only proponent testimony on a proposal (HB 337*) that would require payday lenders offer borrowers additional time to pay off a loan. Speaking on behalf of the Ohio Financial Services Centers Association, Darryl Dever called the measure "a much more reasonable approach" than alternative bills that seek to cap the annual percentage rate of the loans at 25% or 36% (HB 358* & HB 333*). He said the current 391% APR is "clearly the wrong measuring stick" to gauge the two-week loans. Chairman Chris Widener (R-Springfield) said in an interview that he hasn't formally queried committee members about their positions on the various payday lending bills, but their concerns are evident through their questions to witnesses. "There are concerns as to what Ohio would be like without this type of loan product," he said. Sponsors of the rival proposals have acknowledged that capping APRs would likely drive the industry out of business. The chairman expressed interest in requiring consumers to complete the proposed financial literacy program prior to being able to take out multiple payday loans. Despite the promise of financial literacy programs, "My experience is unless you link it to the actual customer going into a storefront to get a loan, you're probably not affecting behavior." Committee members are interested in finding new ways to encourage other options for small amount, short-term loan products, he said, pointing to the bounty of questions regarding extended payment plans. "That's probably leading to discussions, from what I heard, about other products that this industry would offer that would perhaps be more regulated, more consumer-friendly, less likely to be predatory practices," Rep. Widener said. Rep. Armond Budish (D-Beachwood) asked Mr. Dever whether the industry would oppose extending the proposed payment plan to six months. Currently, the bill requires lenders to offer four additional pay periods, which usually equates to two months, to struggling borrowers one time annually. "That's certainly the decision of the committee, but we believe two pay periods is the appropriate way to go," Mr. Dever replied. Patricia Cirillo, senior research associate for the Cypress Research Group, said the payday lending industry has grown rapidly over the past decade because the cost of other options - bouncing checks or paying late fees on bills - has skyrocketed. "Payday lending is a better choice for them." In response to questioning from Rep. Dan Stewart (D-Columbus), Ms. Cirillo said her research shows that average borrowers take out about 11 or 12 loans a year. Mr. Stewart said that would imply that borrowers are compounding interest rates by taking out multiple loans. "Maybe that's not the best solution to their problems." Niger Innis, national spokesman for the Congress of Racial Equality, said bounced check fees and other banking fees spiked in states that capped payday lending APRs. "I'm not convinced that by banning that product these people are out of danger. They'll find another way to get in danger." Rep. Sandra Williams (D-Cleveland) asked whether CORE would support the option of regulating the number of loans borrowers could take out each year. Mr. Innis said he didn't think that was an appropriate solution. Buckeye Institute guest scholar Tom Lehman recommended committee members exempt banks and credit unions from state usury laws that cap interest rates "far too low to make small loans a profitable alternative for conventional banking." That would offer an alternative that could introduce competition and reduce the APR on payday loans, he said. Speaking to reporters after the hearing, Ohio Coalition for Responsible Lending spokesman Bill Faith said extended payment plans are ineffective in preventing consumers from taking out multiple loans. "Our main problem with payment plans is that it doesn't stop repeat borrowing in the states that have it," he said, referring to states that have passed legislation similar to House Bill 337. "Once you start, it's hard to stop." The panel will hear testimony on the proposal to cap interest rates at 36% APR Wednesday morning at 8:30. |
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