Last August, I wrote a piece calling for an end to predatory lending practices in Alabama. Now, legislation is in the works to regulate this exploitative industry. On Feb. 28, legislators introduced a bill to the Alabama House Constitution, Campaigns, and Elections committee, proposing an amendment to the state constitution that would cap the maximum interest rate on payday loans. House Bill 321 addresses what advocacy groups have deemed “Alabama’s Toxic Lending Problem” and seeks to make the necessary first step in solving the problem.
Toxic is a good word to describe the payday lending industry. It has plagued low-income communities for a long time. Payday lenders put on a business-as-usual front and hide their true nature in the fine print. By keeping a low profile and making sure the right people get their contributions during the election cycle, the predatory lending industry has been able to dig in across the state. Currently Alabama has more payday lenders, per capita, than any other state.
This does not come as a surprise. Not only do these firms charge upwards of 300 percent APR (it can reach up to 456 percent) on their loans, but they are able to do it blatantly under the protection of the Small Loans Act. For reference, the legal cap on a normal loan’s interest rate is 8 percent, anything higher is considered usury and therefore illegal. The Small Loans Act, however, exempts lenders who provide loans under $500 from this rule. The legislative justification behind this act is the existence of a widespread demand across the state for small cash loans, and that the financial risk of providing such a service requires rates higher than 8 percent to be charged.
The Alabama State Banking Department partnered with Veritec Solutions, a regulatory data collection agency, a little over a year ago to gather information about the industry’s activity in the state. They found that between Oct. 2015 and Sept. 2016, there were 2,040,948 loans taken out. The total loan volume added up to roughly $668 million with total advance fees of $116 million. A total of 238,797 Alabamians took out loans during that span, about 5 percent of the state population. One of the most revealing statistics showed that 50 percent of these borrowers extended their loans more than six times, meaning they ended up paying more than the cost of their loan in interest.
The majority of payday lending companies operating in the state are privately held. A privately held company is not publicly traded on the stock market, and is therefore not required to disclose its financial records. This makes it difficult to determine exact profit margins for these firms, further complicating the regulation process.
The campaign finance numbers from the most recent election cycle shed some light on the industry’s activities. Companies such as CashAmerica and Title Max contributed over $700,000 to candidates (mostly incumbents) during Alabama’s last election cycle. When support for industry reform was garnered during the 2013 legislative session, it was quickly shot down by groups lobbying for the industry. Those lobbyists (SAHR, Tucker Consulting) have also made considerable donations to state political campaigns.
House Bill 321 is a big step in the right direction when it comes to combatting the exploitative tactics of the industry. Basically, the bill would enact a 36 percent percent cap on the interest rate charged on payday loans. The bill has received bipartisan support, 30 Republicans and 15 Democrats in sponsorship. It states, “A sound consumer lending practice vitally affects the general economy of this state and the public interest and welfare of its citizens.” This could not be more true. A small cash loan can be an incredibly useful tool in emergencies for people without solid financial standing, but only if they are free from the threat of exploitation.
The bill is proposed as an amendment to the state constitution, which means it takes 63 votes to pass. It currently needs 18 more votes, so get in contact with your representative and make sure they support House Bill 321.
Sam Jefferson is a junior majoring in economics. His column runs biweekly.
