JEFFERSON CITY -- The first battle between proponents and opponents of more stringent unsecured consumer loan reform -- often nicknamed payday loans -- in Missouri will take place in the courtroom -- over finances.
On Aug. 9, Secretary of State Robin Carnahan approved a ballot summary for an initiative petition by Missourians for Responsible Lending to appear on the November 2012 ballot. Through the initiative, the group seeks reform that has stalled in the State Legislature.
The group, which includes several faith communities and faith-based organizations, supports capping effective annual percentage rates at 36 percent and limiting fees and finance charges. Advocates believe the unsecured loan business locks some consumers into a debt trap because of high interest and repeated loan renewal.
Under current state law, effective APRs can rise to as much as 1,950 percent, depending upon the fees charged.
Missourians for Equal Credit Opportunity oppose further restrictions on an industry, they say, that provides a necessary service by offering loans for smaller amounts than most banks will consider.
Both Missourians for Responsible Lending and Missourians for Equal Credit Opportunity filed legal action in Cole County Circuit Court in Jefferson City to contest Missouri Auditor Thomas Schweich's fiscal impact statement. Both lawsuits claim Schweich used only one analysis to determine the financial cost of reform that does not provide a realistic picture of the reform's fiscal impact.
Using an analysis by Joseph H. Haslag, who holds the Kenneth Lay Chair in Economics at the University of Missouri, Schweich estimated government entities would lose $2.5 to $3.5 million. The loss would be partially offset by savings on "reduced monitoring" of the small loan industry.
Missourians for Responsible Lending claims Schweich ignored information from several state agencies; the cities of Kansas City, St. Louis and St. Joseph; and Greene and St. Louis counties. The group claims those entities have indicated there would be no fiscal impact on them, and is asking the court to reject the fiscal impact statement.
The group's legal action asks that the fiscal impact statement include analysis from the Missouri Office of Administration's Division of Budget and Planning, the Department of Revenue and the Division of Finance that oversees small loan regulation.
Missourians for Equal Credit Opportunity also is challenging the auditor, declaring his estimate is too low because it leaves out the cost of reform on the industry itself.
Payday loans were designed to be small, short-term loans to assist an individual or family in an emergency. Loans must be paid back within 14 to 31 days. The annual percentage rate on payday loans in Missouri in 2010 averaged 444.61 percent, according to a Division of Finance report.
If the borrower cannot repay the loan, he or she can renew it up to six times under current law. Because loans are not tracked electronically, borrowers can get a loan from more than one company.
Several attempts have been made to reform the law through legislative channels. In the last session, a House bill supported by the industry was not reported out of committee. That bill would have set the effective APR at 1,564 percent and dropped the number of loan renewals from six to three. It would have required a one-day cooling-off period after a loan was paid before a borrower could get another, and would have called for borrowers to pay 25 percent of the principal when a loan was renewed.
Another House bill considered last session, which Missourians for Responsible Lending supported, would have capped the APR at 36 percent, with a two-week wait, and would not have allowed borrowers to renew a payday loan. In addition, it would have included a 90-day payback period and required partial payments on a loan every two weeks.
Missourians for Responsible Lending are seeking those reforms through the ballot initiative, which calls for tighter regulation of payday, title, installment and consumer credit loans.