For many Oklahomans in a financial trouble, payday loans can seem like a quick and easy fix. Borrowers can take out a payday loan for up to $500, secured by a post-dated check, usually for a period of 12 to 14 days. Under Oklahoma’s deferred deposit lending act, payday lenders can charge $45 in fees for a $300 loan, which amounts to an APR (annual percentage rate) of 391 percent.
While some borrowers turn to payday loans for an emergency car repair or other one-time needs, the industry’s successful business model is built on repeated borrowing by customers facing chronic financial difficulties. Data from Oklahoma’s payday loan database revealed that a majority of all loans went to borrowers who took out twelve or more loans over the course of a year — or an average of more than one loan a month.1 Fifty-three percent of all borrowers took out seven or more loans in a year, compared to just 28 percent who took out three loans or less. The average customer who comes up chronically short of being able to pay their monthly bills paid $324 in fees to payday lenders in 2014.
This dependence on repeat borrowing creates a debt trap, which can be extremely difficult to escape. The industry especially targets struggling households and communities. A 2015 study found that most of the payday loan outlets (199 out of 324) in Oklahoma were located within a 10-mile radius of military installations and bases. The same study found that census tracts with economically vulnerable populations (elderly, young adults, immigrants and lower income) are more likely to be targeted by payday lending stores.
This legislative session seemed to offer hope for much-needed reform to curb industry practices that lead to chronic borrowing and growing indebtedness. Several reform bills were introduced, including HB 1596, authored by Rep. Kevin Calvey (R-Oklahoma City), which would have limited borrowers to one loan at a time, required a 24-hour wait period between loans, and limited borrowers to no more than 90 days with loans over the course of a year. If payday loans are truly not intended to be an ongoing source of quick cash, as the industry claims, then limiting borrowers to six or seven loans a year shouldn’t be a problem.
Unfortunately, Rep, Elise Hall (R-Oklahoma City), the chair of the committee to which HB 1596 was assigned, refused to allow the bill a hearing. This was not surprising, as the payday loan industry and its lobbyists have stifled reform measures for the past 15 years. What was more of a surprise was that last week, three days before the deadline for hearing bills in committee, a new bill was introduced by Rep. Chris Kannaday (R-Oklahoma City) that looks to create a brand new form of high-cost loan.
HB 1913 creates a new loan product, known as a Small Loan, which could be made for up to $1,500 for a 12-month term. Lenders could charge 17 percent monthly interest, which amounts to an APR of 204 percent. Borrowers would be hit with a $255 interest payment at the end of the first month, which could be withdrawn automatically from their bank account. To pay off the full $1,500 loan over 12 months, borrowers who avoided defaulting would pay cumulative interest of $2,108.
The payday loan lobbyists who are pushing the small loan bill assert that this new product is needed because of federal rules proposed by the Consumer Financial Protection Bureau aimed at curbing the payday loan debt trap. They claim that the federal reforms, if enacted, would kill the payday loan industry and that the small loans authorized by HB 1913 would serve as a replacement. But the future of the CFPB rules that emerged under the Obama administration is highly uncertain under the new Trump administration. And there is nothing in HB 1913 that suggests that small loans would be a replacement for payday loans should those cease to exist. Instead, HB 1913 would create a new high-cost product in addition to payday loans.
In reality, the high-cost loans proposed in HB 1913 are an entirely unnecessary alternative. In addition to payday loans, Oklahoma law provides for other categories of loans up to and in excess of $1,500. For loans over $1,470, known as “A” loans, the maximum APR is 30 percent, and a borrower would pay one-eighth the interest on a 12-month $1,500 “A” loan as they would under a HB 1913 small loan. On a $1,000 loan, existing law allows supervised lenders, or “B” lenders, to charge interest and fees of $394, which is less than one-third of what could be charged under HB 1913.
Furthermore, even hard-pressed consumers have better options than high-cost loans. In a 2012 survey of payday loan customers conducted by the Pew Charitable Trusts, when asked what they would do if payday loans were unavailable, 81 percent said they would cut back on expenses, 62 percent said they’d delay paying some bills, 57 percent would borrow from family and friends, and 57 percent would sell or pawn personal possessions. These may all be difficult choices, but none creates a high risk risk of deepening indebtedness, or the threat of heavy bank fees and ruined credit if you can’t make good on your payday loan.
Far too many Oklahomans are already falling prey to loans with exorbitant costs. The question that lawmakers must ask themselves when it comes time to vote on HB 1913 is whether creating a new loan product at 17 percent interest a month is going to solve anyone’s problems or simply create new ones?
1 The data is from 2011; the Oklahoma Department of Consumer Credit no longer shares aggregate information from the database as the result of a law passed in 2012 that keeps this information from the public.