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Missouri Needs Real Payday Loan Reform

Payday Loans in Missouri

Payday loans are short-term loans of $500 or less that are made in anticipation of a borrower's upcoming paycheck. For example, say Joe needs $300 to repair his car but he doesn't get paid until next week. Using his upcoming paycheck as collateral, Joe could take out a payday loan and get the money to pay the mechanic right away. Sounds harmless, right? Wrong. Payday loans have been dubbed "the modern equivalent of loan-sharking," and for good reason. The problem is that Joe's $300 loan comes with a very high interest rate - 454% on average. This means Joe will owe not only the original $300, but also high interest fees on top of that. Data shows that most folks like Joe who take out payday loans will not be able to pay back the full $300 plus the additional interest fees as soon as they get their paycheck. This is where the cycle of debt begins - fees and interest mount and Joe can't pay it all off at once. Joe "rolls over" or renews the loan only to have further interest and fees pile up, so he rolls over the loan again, and the cycle continues. The payday lending industry thrives on issuing predatory loans to these repeat customers who fall deeper and deeper into debt. The average borrower in Joe's position will end up paying more than $700 for a $300 loan.

Payday lenders argue that they're providing a useful service to folks who don't have access to more traditional sources of credit, like banks and credit cards. They claim that reining in their outrageous interest rates will cut into their profits and cause them to go out of business. This is simply untrue, as several states have capped interest rates at reasonable levels and enacted strong consumer protections without driving payday lenders out of business. 

Sham Reform

Sen. Mike Cunningham (R-Rogersville) is the sponsor of SB 694, the so-called payday loan reform bill. It would prohibit the practice of "rolling over" a loan and require lenders to give borrowers like Joe an extended period to pay off their loan without additional interest and fees. It would also remove the existing sky-high interest-rate cap of more than 1950% APR. 

As the Springfield News-Leader explains, "While the bill is presented as a way to reform the current payday loan laws and protect the consumer, it does neither." Banning loan "rollovers" sounds good, but in this bill it is a mere technical change. It doesn't remedy the underlying problem of Joe being trapped in debt. Instead of "rolling over" the loan, the lender will simply make another loan to Joe. Instead of having one loan to pay off, Joe will have multiple loans at once, each with their own interest compiling on top of the original loan amounts.

Over the years, the payday loan industry has been notoriously proactive in beating back any bills that would rein in their extreme practices. In 2012, payday lenders waged a deceitful multi-million dollar effort to stop strong consumer protections from these predatory loans. Given this history, it's odd that the industry "offered no significant protest" when Sen. Cunningham presented his bill. The sad reality is that the payday loan industry supports this measure so they can cynically proclaim that "reform" has passed and consumers are protected, all while they continue to rake in profits on the backs of Missourians who find themselves in a tight spot. This is why the Kansas City Star called the measure "a gift to the industry disguised as reform."

Real Reform

Actual reform looks quite different from what's proposed in Sen. Cunningham's sham reform bill. Instead of making technical changes that do nothing to fix the underlying problem, real reform would help Missourians like Joe avoid and escape the payday loan debt trap. The central idea is based on former U.S. Senator Jim Talent's (R-MO) legislation that protected Military families from predatory lending practices. Sen. Talent's Military Lending Act capped the interest rate on payday loans at 36% APR, significantly lower than Missouri's average rate of 454%. 

Eleven states have reined in their predatory payday lending industries with laws that cap the annual interest rate and limit the annual number of loans that can be issued to consumers like Joe. None of these states has seen the sky fall. What they have seen is fewer consumers stuck in the debt trap. It's time Missouri follows suit by rejecting sham reform and imposing a cap on payday loan interest rates.

@ProgressMO

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