JEFFERSON CITY -- Missourians need lending options, and a possible November ballot initiative to reform laws governing unsecured, short-term consumer loans -- often nicknamed payday loans -- could kill the industry in the state, Sen. John Lamping (R-St. Louis County) believes.
That's why he is sponsoring legislation that focuses on regulating the number of loans individuals can seek, as well as setting a cap on total fees and interest. And, he believes, the approach he is taking would benefit consumers, while keeping the payday lending or payday advance industry viable.
"There is clearly a demand to borrow...on a short-term basis," Sen. Lamping said in a recent interview, noting that 94 percent of those loans are paid back in Missouri.
He argued that many individuals cannot qualify for more traditional loans. Many have poor credit ratings and have no access to credit cards, especially since laws governing cards have tightened. Many people also have no credit capability in the near future.
Payday loans were designed to be small, short-term loans to assist an individual or family in an emergency. Under current Missouri law, effective annual percentage rates can rise to as much as 1,950 percent, depending upon the fees charged. The APR on payday loans in the state averaged 444.61 percent in 2010.
Loans must be paid back within 14 to 31 days, most often within two weeks. If the borrower cannot repay the loan, he or she can renew it up to six times. Because loans are not tracked, borrowers can get a loan from more than one company at a time.
Advocates for reform, particularly Missourians for Responsible Lending, have been pushing for a 36-percent cap on interest rates, with a 90-day payback period. The group has filed a ballot initiative and is currently collecting signatures to get it before the voters on Nov. 4. The industry is fighting the proposal through Missourians for Equal Credit Opportunity.
Rep. Mary Still (D-Columbia) has been a reform advocate in the House of Representatives. This session she and several other legislators are co-sponsoring H.B. 1294 that would cap the effective APR at 36 percent. Her bill addresses several forms of short-term lending, including car title and short-term installment loans.
Sen. Lamping's bill only seeks payday reform. Sen. Lamping believes the 36 percent cap adopted in other states "eliminated" the short-term loan industry in most of those states, and that the same thing would happen in Missouri. His bill, S.B. 476, would be an effective compromise, he said.
"Where will people borrow?" he asked.
His proposal would allow borrowers only one loan at a time, and only simple interest and fees could be charged, with the APR capped at 75 percent on the amount financed for up to 90 days. One major component is the call for the state's finance division to develop and administer a real-time compliance system for payday lenders to record transactions. Such a tracking system would help hold borrowers and lenders to the single loan requirement, the senator believes.
"Some in the industry...are only going to be here as long as things remain the same," Sen. Lamping said. "My legislation will shrink it but not do away with it.... Those who take a more community-bank approach will still be here."