Jeff Merkley's big win against predatory payday loans

MerkleyrockyOne of House Speaker Jeff Merkley's big priorities this legislative session was enacting HB 2871 - a 36% cap on all consumer lending, ending the practice of charging an average of 528% interest on short-term loans. It passed the Senate yesterday, and achieved final passage in the House this morning.

From the O:

House Speaker Jeff Merkley, D-Portland, who sponsored House Bill 2871, called it the most significant consumer bill in the last decade. The Oregon payday loan industry, which made 841,000 loans worth $278 million in 2005, is squeezing millions of dollars from working families with its high interest rates, he said.

"Thousands and thousands of Oregonians will still get the short-term loans they need," he said, "but they will get them under 36 percent. . . . It will be a huge, huge improvement for the quality of life of Oregon families."

Advocates expect the number of predatory lenders to decline -- no great loss, since there are more payday loan shops than McDonald's restaurants in Oregon.

Consumer advocates, religious leaders, the AARP of Oregon, food bank operators, various city councils and others have argued that regulations are needed to prevent lenders from trapping vulnerable low-income Oregonians in vicious cycles of debt.

Read the rest of yesterday's Oregonian coverage.

Comments

  • (Show?)

    This is a good win. What Kate Brown was trying to do with that shit anti-mortgage broker bill is beyond me. Either someone hoodwinked her, or something even more rotten is going on.

    Scott and the GOP we salivating that the Dems pass that odious bill. The Dems really need to bone up on the fall out of the the details that get slipped in as amendments to well intentioned but not solidly crafted or thought out bills.

    Politically alone it will have been an absolute train-wreck for if Dems let that Bill out of Rules and it gets to the Gov. desk, where OurOregon insiders will push that thing to get Ted's signature on and there by signed of on a neutron bomb for the Dems politically, let alone what it would do to the mortgage-broker industry (it would literally close it down over night in total) and (ironically) harmful to low-income and middle-income Oregonians looking to get workable mortgage vehicles.

    With this one (pay day loans) at least it is solid legislation and Oregon now joins many others states in shutting down the real predatory pay-day loan outfits, as opposed to the mortgage bill which would have thrown mortgage-brokers into the pit between being sued by the State of Oregon or pitting them against the Federal Gov. and the Fair-Lending Act (which is why mortgage brokers would simply shut down).

  • North Coast Demo (unverified)
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    Couldn't agree more on SB965. At least some house members are getting the message - I had several communiations with Deborah Boone this week requesting that she look hard at this bill and she assured me that at this juncture she was a no vote. However she did note that it was still being amended and her position could change. First time homebuyers, working class oregonians and rural purchasers are going to be shut out of home ownership if this passes.

    As for the payday loan bill - overdue! Nice work by Merkley.

  • Ibid. (unverified)
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    That's $36 per $100 borrowed - when did that become fair? This isn't a 'big' win by any means. It's just less unfair than 528% and not much more.

  • (Show?)

    For those who have paid 630%+ (like my sister), 36% sounds a heck of a lot better and a lot fairer.

    If I remember correctly from the hearings I attended last year, banks and credit unions are allowed to charge up to 18% for these kinds of loans (set by the feds). The payday loan places can charge up to twice that. While banks have other areas to get their profit from, payday loan places get it just from these loans (some also cash checks, which they also charge too much for).

    I think 36% is a fair compromise to keep these places open for those who need them, yet keep those who do need them from paying out the rear end in fees.

  • (Show?)
    Posted by: North Coast Demo | June 08, 2007 at 03:58 PM

    Ever look at what many interest rates credit-cards charge if you make one late payment?

    While I agree that the number could, and should, be lower for the cap, that there is now at least going to be a cap which is double-digit as opposed to no cap and high triple-digit rates... it is a big win. BTW, when I say big win, I meant politically (and because it is substantive)... more than this is THE BEST leading-edge cap rate imaginable.

    At least this gets a cap into the law. We can always revisit the rate of the cap and move it lower in other sessions. Particularly when it shows that this doesn't put the entire industry out of business (just the egregious predatory ones) like the propaganda while push by the shills. Sorta like the fact that MA has not be smote by the sky-pixie, or rampant degeneracy and collapse of heterosexual marriages didn't occur, because that state stopped discriminating against non-heterosexuals. The first hurdle is often the hardest to clear.

    Don't let perfect be the enemy of the good.

  • (Show?)

    Ugh.

    ...like the propaganda while push by the shills.

    shoudl read:

    ...like the propaganda which will be pushed by the shills.

    Is it the weekend yet?

    (weak smile)

  • Finally (unverified)
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    Great to see Democrats standing up for the little guy!

    Jeff Merkley and Kate Brown are heroes for telling the financial industry lobbyists they need to separate themselves from predatory lenders. The problem is, even "mainstream" banks now invest in immoral, ruthless products created to yield huge profits at other people's peril.

    Shame on those trying to confuse the public into thinking reforms which are working in other states are somehow going to hurt legitimate businesses in Oregon. I'm so tired of big powerful interests claiming they will be put out of business if they are in any way subject to reasonable regulation.

    There's no reason to take these people seriously when all they ever do is claim the sky is falling anytime it rains on their parade.

    Thanks for having the courage and resolve to do what's right Jeff! Go get'em, Kate!

  • wow (unverified)
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    The post from Ibid confirms what I've long suspected, which is that the vast majority of Oregonians (and probably legislators like Donna Nelson), believe that a 36% interest rate cap means payday lenders can charge $36 per $100 borrowed. In actuality, the 36% is an annual percentage rate. This means that on a $100 unsecured loan for a 1 month period, a lender can only charge a whopping $1.03 in interest - not $36. I think HB 2871 also allows a lender to charge a $10 origination fee, so the total amount charged for the loan would be actually be $11.03. My point, however, is that I suspect many Oregonians have been led to believe that lenders can charge $36/$100 under HB 2871, which is completely untrue.

    I would also like to point out that HB 2871 does not cap interest on all consumer loans at 36%. Instead, it caps interest on consumer loans offered by the storefront loan shops people despise, while allowing banks and credit unions to continue making payday loans at triple digit interest rates as well as charging fees that would blow your mind if calculated as an annual percentage. Lest there be any doubt that banks and credit unions (who are exempt from HB 2871) do in fact do what I'm saying, go check out the terms and conditions of U.S. Bank's "Checking Account Advance" product and the terms and conditions of Oregon Community Credit Union's Payday Loan product. You will find the U.S. Bank charges $120% interest and that Oregon Community Credit Union Charges between 120% and 181%Better yet, find out what the typical interest rate is on a refund anticipation loan from HR Block or some other similar institution that is not covered by HB 2871.

  • Rex Hagans (unverified)
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    Speaker Merkley is the most stand-up political leader I have ever seen. A lot of folks want to tell you how they are for the "little guy," but Jeff is the real deal!

    We all owe him big time!

    Rex Hagans Coaltion for Economic Fairness

  • Brian (unverified)
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    Leadership in public life often requires taking a moral stand on issues. While there were many legislators who took the stand to end predatory lending in Oregon, Speaker Merkley was the man who led the way. Thank you Speaker Merkley.

  • SW (unverified)
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    Hooray for Merkley! Such a champion! Vicki Walker and Floyd Prozanski advocated for this years ago but the R-controlled legislature killed the idea. Merkley is merely in the right place at the right time.

  • (Show?)

    Actually, during the hearings last year, I am almost certain they talked about how banks and credit unions are capped by the federal government at a rate of around 18%.

  • David Wright (unverified)
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    Jenni, US Bank does offer a 120% "Checking Advance" product -- I blogged about it almost a year ago when I first noticed it. I double-checked this afternoon and the information is still available on their web site (as "wow" mentioned above).

    Perhaps there is some specific type of loan that is capped for banks as you describe, but effectively mainstream banks are in the payday loan business as well.

    I believe "wow" is incorrect however in the assertion that a one-month $100 loan at 36% would be only $1.03 -- even at simple (not compound) interest 1/12th of 36% is 3%, or about $3 on a $100 loan. Of course, the actual amount would be less than that if the APR is 36%, and $1 or $3 it's still a mighty paltry sum for a high-risk loan.

    Lestatdelc wrote:

    Sorta like the fact that MA has not be smote by the sky-pixie, or rampant degeneracy and collapse of heterosexual marriages didn't occur, because that state stopped discriminating against non-heterosexuals.

    What the heck does this have to do with anything? In the example you cite, alarmists worried that allowing behavior by one group of people would destroy the fabric of life for other people, where there was clearly no connection between one thing (gay marriage) and the other (collapse of hetero marriage).

    In this case, you have dramatic restrictions on one group of people (lenders) which will obviously have a direct impact on the viability of that group's actions. Of course there is a reason to expect that slashing the profitability of an industry will have a dramatic effect on that industry. Whether that impact will be good, bad, or indifferent -- it will be dramatic.

  • Moderate Republican (unverified)
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    I too am opposed to the usury imposed by payday and car title lenders. People who resort to those type of lenders have much graver problems and I truly sympathize with them.

    However, if the payday lenders simply evacuate the state, as they are likely to do under these new rules, who will make the loans?

    I won't. Will you?

    Will Jeff Merkley?

  • Rich Rodgers (unverified)
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    I first got to know Jeff Merkley in the late 1990s when he was fighting for fairness in the way the city of Portland charges for stormwater rates. He was always unfailingly polite, unrelenting, and completely fair in his advocacy for the people, churches, schools & businesses in east Portland. It took a long time, but he & retired David Douglas superintendent Howard Horner got the discounts that people deserve.

    I'm so happy to see that our legislators have recognized what a natural leader we have in Jeff Merkley. He's brilliant, hardworking, and as principled as a day in June is long. It gives me a lot of hope that he is Oregon's Speaker of the House.

  • (Show?)

    Other states have passed similar legislation (we're something like the 36th state to do this), and they still have payday loan shops.

    You may see some locations close, though, since it won't be so profitable to have one on almost every corner in the poorer neighborhoods of Portland, Gresham, etc. (Some areas have more than one store on a corner).

    But there is still profit to be made, and they're not going to go away.

    And it's not that this bill exempts banks or credit unions. From what I read, they're currently not listed as a payday loan shop in ORS 725.600. I know from sitting in hearings that everyone who came in to testify had gotten their loan from a payday loan shop, not a bank or credit union. Those I know who have gotten them from one of those two locations had fees and interest much, much, much lower and easier to pay than the payday loan shops. They also didn't have their checks cashed multiple times prior to the agreed upon date (meaning multiple fees and just about guaranteeing the person will be unable to pay come payday).

    Also, I thought I'd heard in the hearings, but I could be wrong, that banks and credit unions fees and interest are controlled by the feds, not the state. I could be wrong.

  • Bert Lowry (unverified)
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    My friend Mike said something that really struck me. He said there used to be usury laws and they were generally viewed as a good thing because greed was generally viewed as a vice. But not any more.

    When did greed stop being a vice?

  • mrfearless47 (unverified)
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    David Wright and wow both have it wrong about US Bank's payday advance loan. There is no stated or implied interest rate, although one can infer one from their website. It isn't 120%. Read the web page again carefully. They charge 10% of the loan value and require it to be paid off quickly from direct deposit checks. They charge a $10 loan origination fee with a minimum loan of $20. The maximum loan is $500 of 1/2 of the typical direct deposit check, whichever is less. It isn't $10 per month, per year or anything. It is a flat fee of $10 per hundred loaned. There is no way to calculate the interest rate without knowing how long it takes for someone to repay the loan. They've covered themselves well.

    As for the assertion that banks and credit unions are federally regulated, that is correct. They are not capped at 18%; if they were, you wouldn't see Citibank and Capitol One, to name two, charging 23% APRs for their riskiest clients on their credit cards. My citicard charges me 14% IF I run a balance, which I don't. I think the federal usury limit is 24%, with exceptions for Visa and Mastercard accounts. The usury limit typically applies to secured loans, not unsecured loans. I suspect that US Bank might end up rethinking its plan if it is forced to deal with payday lenders who charge less.

    Like college tuition "freezes", the true costs depend on what "fees" get slapped on top of the allowable interest rate.

    Anything done to reign in the payday industry is good. It is also good that the OUS is finally being forced to look at the fees it charges its students. As a retired faculty member, I can tell you that there is no value to the students in those fees - just a sneaky revenue source for the entity levying the fees.

  • Russ Kelley (unverified)
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    And it's not that this bill exempts banks or credit unions. From what I read, they're currently not listed as a payday loan shop in ORS 725.600.

    Thanks for pointing that out Jenni.

    For further clarification, since most banks and credit unions are federally chartered, they cannot be regulated by the State of Oregon.

  • David Wright (unverified)
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    Mrfearless47,

    Did you look at the "terms and conditions" link on the US Bank site? That is where they disclose the terms, including:

    • Payoff of advance and finance charge is automatic. Payments will be deducted from your checking account with your next direct deposit(s) of $100 or more, or, if not fully paid, on the final payment date, which is the 35th day after your advance
    • Finance charge is $1 for every $10 advanced (120% APR)
    • Advance between $20 and your limit. If your checking account is overdrawn, you must advance enough to bring your account to a $0 balance

    (Emphasis as in the original)

    You are correct that to calculate APR you must know the duration of the loan; and given that the duration of this type of "advance" is variable depending on the timing of your next direct deposit, they understandably calculate the minimum APR based on the maximum duration of 35 days.

    Note the clever little clause there that if you aren't able to cover the repayment in time, they'll gladly clean out your checking account and roll over another advance to cover you. Doubtless after they charge the NSF fees for overdrawing your account.

    Anyhow... the terms stated by US Bank are basically expressed similarly to the payday loan shops. None of them advertise a 600% APR either, they simply refer to the "fees" for the loan. So the original point that mainstream banks are in the business of offering payday loans (albeit at possibly better rates than other shops) is still valid.

    Is it true that federally-chartered banks are not subject to state regulation? Because I notice that in the case of most credit cards I've had (Chase, Citibank, B of A) there are special terms & conditions for residents of particular states. I have to assume that means that those terms are in place to comply with specific laws in those states. Generally those special terms have to do with the fees that they charge for various things, so one would imagine that rate caps in a particular state very well may be enforceable.

  • (Show?)

    Please note that credit cards and the laws and regulations surrounding them are completely different than the laws and regulations on loans.

  • Ibid. (unverified)
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    "...The post from Ibid confirms what I've long suspected, which is that the vast majority of Oregonians (and probably legislators like Donna Nelson), believe that a 36% interest rate cap means payday lenders can charge $36 per $100 borrowed. In actuality, the 36% is an annual percentage rate.

    Right - which is an effective $36 per $100. Breaking it out by month means nothing, the effective rate is still more than 1/3rd of the amount borrowed, currently $36 per $100. Regardless if it's paid back one day or one year.

    So if you take the loan out one month and pay it back the next you might not pay out $36, but it is still effectively $36 per $100.

    While that may be better than triple digit interest rate - it is still GROSSLY unfair.

    Correct me if I am wrong, but aren't we Democrats in charge? If we're not going to pass just laws now, when exactly are we to expect them?

  • Fuzzy Math (unverified)
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    Breaking it out by month means nothing, the effective rate is still more than 1/3rd of the amount borrowed, currently $36 per $100. Regardless if it's paid back one day or one year.

    Ibid., that couldn't be more incorrect. If you bothered to read the bill, you might understand the issue a bit more.

    This is basic math. If 36% is the allowed Annual Percentage Rate, then the term of the loan absolutely does matter.

    Jenni is right that credit cards and loans are regulated in completely separate sections of the U.S. Code, but one of their similarities is in the way the interest is figured. Just take a look at the bottom of your credit card statement to see that you don't get charged the "Annual Percentage Rate" every month on your outstanding balance. Each day you get charged the average daily rate, which will be a fraction of a percent. Seemingly small, but we all know it adds up over time.

    Let's put it this way. If you spend $100 on your 18.99% APR credit card, carry the balance forward and pay it off the next month, you won't be making a $118.99 payment. Your payment will be around $101.61. Don't believe me? Try it.

    In any case, I'm left wondering how you can say that the term of the loan doesn't matter when the percentage rate is expressly indicated over a particular term (annual = per year).

    You seem to have invented this "effective rate" idea all on your own. APR's are about as basic a financial principle as any. I hope you are not in charge of your household finances.

    At any rate, yeah 36% APR is high. But let's not forget that these are short-term, non-depository, unsecured loans. I'm no fan of the industry, but they do take a risk on some of the people they lend to. And as any student of markets knows, the greater the risk, the greater the potential for return.

    This is, in truth, a fantastic bill. Short-term lenders can still turn a profit. High-risk borrowers can still access cash. And no one gets taken to the cleaners just for trying to put food on their families.

  • (Show?)

    Nice answer, Fuzzy!

    "You're working hard to put food on your family." —Presidential candidate George W. Bush, Nashua, N.H., Jan. 27, 2000

  • freemarketreformer (unverified)
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    fuzzy math got it pretty close -- until the end of his post.

    short term lenders will not be able to turn a profit. Most will leave. Many, if not most, have already done so or are shutting down as we speak. The fact is that payday customers typcially have no credit or bad credit. Otherwise, they wouldn't be paying these rates to begin with. These companies know that they cannot stay in business at the rates allowed by the state and are leaving. A very few of the shops who have a significant other line of business (probably check cashing) may try to continue payday for a while in the hopes that the mushrooming volumes will enable them to at least break even on the payday type loans.

    If the customers of the current payday lenders could get a 25% or 36% APR loan from one of the big installment lenders, don't you think they would do it rather than paying the existing payday loan fees. Unfortunately for the customers, most of which are hardworking Oregonians, bad/no credit is not synonomous with a lack of need for credit. If you live paycheck to paycheck and will lose your job and the ability to feed your family if you can't get your car fixed, you will find credit one way or the other.

    There is clearly demand for payday loans in the state of Oregon. Driving the payday lenders from the state won't eliminate the demand, just one of the options. Do you think the unregulated offshore internet payday lenders care what law Oregon passes. They will continue to offer 2-week loans at $30 / $100. More Oregonians will be forced to turn from licensed, regulated lenders to these types of loans, including the risk of what happens to personal and financial information when you give it to an unregulated offshore entity. If you doubt me, try filling out an online loan application for a payday lender without a licensed bricks and mortage presence. Better use an dedicated account and expect 1000's of e-mails.

    Another alternative is for these people to simply write hot checks or overdraw their accounts. Unfortunately, if they don't pay off the hot checks, they wind up at the hot check division of the prosecutor's office, unlike checks written to payday lenders which are not subject to criminal sanction. Bank overdraft fees are not considered loans even though the bank runs your credit before deciding whether you pay a reasonable interest rate for overdrafts (like people with good credit) or individual exorbitant fees for each overdraft no matter how small (former payday customers). These fees are essentially unlimited.

    Just wanted to correct the record a little.

  • DesTynNee (unverified)
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    i know alot about checking advance, used it when i was with wells fargo.

    NOT a good idea.

    i also do believe that day it was stated that it is 18%. which is a FAR cry from what i ended up shelling out at 600+ on the payday loan i took out for 200 $, they got 50.. so total loan.. 250.. what did they get.. almost 700 $ in the end

  • Maureen Sloan (unverified)
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    On behalf of the Society of St. Vincent de Paul, I'd like to thank Rep. Merkley for his leadership role in getting HB2871 passed in this legislative session. SVdP works with low income individuals and families in crisis, and tries to meet their needs. Eliminating predatory lending will provide relief to those we serve.

  • Sheri (unverified)
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    What about people that need this short-term loan and can't get it anywhere else. US Bank is cheaper than the other typical lenders and guess what, they leave money in my account and they don't charge NSF fees...of which I was accustom to paying over $100...on a regular basis...not $10 or $20 ....you guys should be in some of our shoes..Thank you US Bank

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