Why RI needs payday loan reform

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First, a disclosure: As part of a course I’m taking, I’m involved with Rhode Island Payday Loan Reform, the coalition whose cause I discuss below.

Payday loans are a way for people who need cash and don’t have access to traditional banking resources to get a loan quickly. Usually, a borrower will bring a pay stub and receive a short-term cash loan which is supposed to be repaid by the borrower’s next payday. The interest rates on these loans are usually extraordinarily high. In Rhode Island, the maximum interest rate is 260%.

RI Payday Loan Reform press conference, RI State House (photo by author)

Last week, members of the RI Payday Lending Reform coalition held a press conference at the State House to advocate for legislation currently in the RI House and Senate that would cap interest rates on such loans. at 36%. The coalition includes local advocates, nonprofits, church groups and politicians.

The problem with payday loans is that they often become debt traps. The coalition notes that the typical payday borrower makes 9 payday transactions per year. The industry relies on extracting all the money it can from a small group of people who have no choice but to turn to payday loans.

A cap of 36% has precedent, both historical and contemporary. The RI used to cap payday loans at 36%, until a special exemption passed in 2001 removed the cap. Seventeen states, DC, and the military cap all payday loans at or around this amount.

Four mayors spoke at the event, and three were Republicans, demonstrating that this is a bipartisan issue. Seventy percent of the public supports a price cap of 36% or less.

The libertarian argument against a 36% cap is simple (as libertarian arguments often are): as long as borrowers are aware of interest rates and fees, taking out these loans is a free choice, and borrowers bear the responsibility for their choice.

At first glance, this argument is powerful. But when considering government action, I think it’s worth asking a few simple questions. Is the group in question vulnerable? Payday borrowers are low-income households with no other financial resources, so the answer is yes. Is there a free market failure that needs to be corrected? Traditional loans are based on the idea that borrowers will have the ability to repay the loan. This is not the case with payday lenders, who rely on debt traps to continue collecting revenue.

There are some arguments in favor of payday loans, including that they provide access to credit to households without collateral to receive traditional credit. But remember, these bills don’t ban payday loans, just bring maximum interest rates in line with national standards.

Wage reform also demonstrates a fact of modern politics: lobbying works, and it’s usually well-funded interests that have lobbyists. A payday lender, Advance America, employs several lobbyists at RI. Two of the lobbyists, as is often the case, are former elected officials: former House Speaker William Murphy and former State Rep. R. Kevin Horan. Their efforts help explain why this popular bill has not passed in recent years.

At the risk of being flippant, I will admit that capitalism is messy and requires the creation of winners and losers. Any intervention in the open market should be considered carefully. But some market failures require public policy solutions, and IR payday loans are one such problem.

A hearing on the payday loan reform bill is scheduled for April 2. The RI Payday Loan Reform website includes more resources on the issue of payday loan reform and also offers citizens the opportunity to sign a petition to express their support for loan reform.

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