By: Sen. Adam Kline

Yesterday in the Senate Labor, Commerce, and Consumer Protection Committee, we had a hearing for SB 5150, my bill to regulate the payday loan industry. I’m a member of that committee. SB 5150 would impose a 36% Annual Percentage Rate cap on payday lenders, lengthen the minimum loan term, prohibit the use of a post-dated check as collateral and create a monitoring mechanism for real enforcement.

Banks and other financial institutions are highly regulated by state and federal laws. In Washington as in many other states, payday lenders are exempt from the laws that keep other lenders from charging predatory interest rates. This was an oversight when our Legislature drafted the state's original banking laws, and payday lenders took advantage of a loophole. As this form of lending became more lucrative, more and more companies entered the field, and they became a more powerful lobby. Now we face an uphill battle to enact laws to protect borrowers from them.

Payday lenders have done a great job of marketing themselves and installing convenient locations in communities across the state. There are far more payday outlets in Washington than there are Starbucks. Starbucks has only 400 locations, and according to our state’s Department of Financial Institutions, the number of payday outlets has almost doubled in the last five years from 377 to 729. They are heavily concentrated in lower income neighborhoods.

Fortunately, there seems to be a nationwide trend towards payday regulation. About 16 states have either outlawed payday lending or never legalized it in the first place.

Payday lenders make their huge profits by giving people a cash advance in the anticipation that the borrower will pay back the advance when their next paycheck arrives. Under Washington law, payday lenders are allowed to lend up to $700 with a term of 45 days or less. The average loan term is two weeks. Borrowers write a postdated personal check for the loan amount, plus the interest charge. Borrowers pay a 15% fee on loans up to $500 and a 10% fee on anything over that amount. For a $700 loan for a two-week term, that translates to $95, or the equivalent of an annual interest rate of nearly 400%.

Payday lenders pitch their product as a quick and easy strategy to cover unexpected expenses or to bridge a short-term cash shortage between paydays. They say that a payday loan is a sensible alternative to bounced checks, late payment charges or a tarnished credit rating.

On the surface, this is sounds reasonable. Who of us hasn’t had the experience of being short of the amount of money we need to pay our basic expenses? It’s a lot easier and quicker to get a payday loan than it is take out a loan from a bank or other financial institution. A lot of folks – including plenty of people who work full-time -- don’t have access to credit or bank loans. Payday loans might be the only loan available to them.

Although payday loans are marketed as short-term loans, the National Center for Responsible Lending states that less than 4% of loans are made to borrowers who take out one loan, pay it off on time, and don’t borrow again that year. Almost 90% of payday lending business is generated by borrowers who take out five or more loans per year. Over 60% of loans go to borrowers with 12 or more transactions per year. Nearly 90% of repeat payday loans are made shortly after a previous loan was paid off. That means that folks get caught in a cycle of taking out successive loans with exorbitant interest to pay back the original amount they borrowed. This adds up quickly, and borrowers often find themselves much deeper in debt than when they started. A person who takes out a $500 loan for two weeks, and then takes out eleven successive loans because they can’t afford to pay off the original loan can rack up at least $900 in fees in six months, on top of the $500 principal.

High interest rates often mean that borrowers quickly find themselves much deeper in debt than when they started. These companies go too far in their exploitation of people in difficult financial circumstances, especially in these financial times. It's not much of a question whether we'll bring these companies under state regulation, but only when and how. A few years ago, Congress placed a cap on the interest they can charge borrowers who are active US military service members, but that "cap" is a not insignificant -- 36% when calculated as an annual interest rate. And it applies only to military members, which makes many of us wonder why the rest of us are not similarly protected.

I’m sponsoring payday loan legislation this year because I strongly believe that we need to legislate a 36% cap on payday loans for everyone. This would save Washington state borrowers millions of dollars. For example, in 2005, payday borrowers paid more than $174 million in fees – and that was when economic times were good! A study by the Brookings Institute found that up to 89% ($155 million) of those fees could have been saved if borrowers had access to an alternative option such as that offered by some credit unions in some of the states that have a 36% cap.

We’ve tried to reform this industry for several years with no success. Hopefully today’s economic headlines have knocked some sense into my fellow legislators and we’ll find a way to at least begin an incremental reform of our legalized loan-sharking industry.