“We’ve pushed continually for regulation in the states,” Green says. “But federal and state governments cannot regulate personal responsibility.” Green adds that denying people access to payday lenders will force them to find other means to come up with needed funds, therefore perpetuating a cycle of debt.
Regulating the industry is exactly what lawmakers aiming to do. In February, Illinois Sen. Dick Durbin introduced a bill that would cap the loan at 36%, instead of an unregulated 390%. Rep. Luis Gutierrez (D-Ill.) and other opponents of the measure — including many payday lenders — say it’s too restrictive. Gutierrez introduced another piece of legislation in the House that would place a national cap on payday loan fees at 15 cents for every $1 borrowed, or $15 for every $100 borrowed. In addition, lenders would be banned from rolling over loans and would have to give delinquent borrowers a repayment plan. The plan would also give consumers an extended repayment period with no additional fees or charges.
Gutierrez says a 36% cap on interest “goes too far,” adding consumers use payday loans to avoid “costly” bank and credit card fees. Green says many in the payday loan industry support parts of the Gutierrez bill including an extended repayment plan but adds that the rate cap will reduce industry income considerably.
A study released by the Federal Reserve Bank of New York in 2007, which compared households in Georgia and North Carolina — two states that banned the loans in 2004 and 2005 — to households in states where loans are legal, found people in Georgia “have bounced more checks, complained more to the Federal Trade Commission about lenders and debt collectors, and filed for Chapter 7 bankruptcy protection at a higher rate [than states that permit payday loans].” North Carolina fared about the same, according the study.
The $40 billion payday lending industry has grown exponentially over the last decade. In California, fees from payday borrowers total $450 million, more than half of which come from African American and Latino borrowers. A report released by the CRL, Predatory Profiling: The Role of Race and Ethnicity in the Location of Payday Lenders in California, shows that even when controlling for other factors which may influence a payday lender’s location, such as household income, lending storefronts are still most heavily concentrated in African American and Latino communities in California.
While African Americans make up 5.9% of California’s population, they account for 18.7% of payday loan borrowers.
Critics who deride the loan practices as predatory and “legal loan sharking,” say because companies do not weed out risky borrowers, it’s used by consumers as a long-term solution to chronic budgeting problems.
“The typical payday borrower doesn’t need $300; They need other things: more income, a car that works, affordable childcare,” Johnson says. “Those communities would disproportionately feel the impact of not having those things.”