Last year, Delaware passed a major payday lending reform bill
But like payday loans, which have annual rates typically ranging from 300 to 700 percent, the new products come at an extremely high cost. Cash America, for example, offers a «line of credit» in at least four states that works like a credit card-but with a 299 percent annual percentage rate. A number of payday lenders have embraced auto-title loans, which are secured by the borrower’s car and typically carry annual rates around 300 percent.
The most popular alternative to payday loans, however, are «longer term, but still very high-cost, installment loans,» said Tom Feltner, director of financial services at the Consumer Federation of America.
For consumer advocates, it was the culmination of over a decade of effort and a badly needed measure to protect vulnerable borrowers. The bill limited the number of payday loans borrowers can take out each year to five.
In Texas, where regulation is lax, lenders make more than eight times as many payday loans as installment loans, according to the most recent state data
«It was probably the best we could get here,» said Rashmi Rangan, executive director of the non-profit Delaware Community Reinvestment Action Council.
But Cash America declared in its annual statement this year that the bill «only affects the Company’s short-term loan product in Delaware (and does not affect its installment loan product in that state).» The company currently offers a seven-month installment loan there at an annual rate of 398 percent.
Lenders can adapt their products with surprising alacrity. Contrast that with Illinois, where the legislature passed a bill in 2005 that imposed a number of restraints on payday loans. By 2012, triple-digit-rate installment loans in the state outnumbered payday loans almost three to one.
In New Mexico, a 2007 law triggered the same rapid shift. QC Holdings’ payday loan stores dot that state, but just a year after the law, the president of the company told analysts that installment loans had «taken the place of payday loans» in that state.
New Mexico’s attorney general cracked down, filing suits against two lenders, charging in court documents that their long-term products were «unconscionable.» One loan from Cash Loans Now in early 2008 carried an annual percentage rate of 1,147 percent; after borrowing $50, the customer owed nearly $600 in total payments to be paid over the course of a year. FastBucks charged a 650 percent annual rate over two years for a $500 loan.
The products reflect a basic fact: Many low-income borrowers are desperate enough to accept any terms. In a recent Pew Charitable Trusts survey, 37 percent of payday loan borrowers responded that they’d pay any price for a loan.
The loans were unconscionable for a reason beyond the extremely high rates, the suits alleged
Employees did everything they could to keep borrowers on the hook. As one FastBucks employee testified, «We just basically don’t let anybody pay off.»
«Inherent in the model is repeated lending to folks who do not have the financial means to repay the loan,» said Karen Meyers, director of the New Mexico attorney general’s consumer protection division. «Borrowers often end up paying off one loan by taking out another loan. The goal is keeping people in debt indefinitely.»
In bothcases, the judges agreed that the lenders had illegally preyed on unsophisticated borrowers. Cash Loans Now’s parent company has appealed the decision. FastBucks filed for bankruptcy protection after the judge ruled that it owed restitution to its customers for illegally circumventing the state’s payday loan law. The attorney general’s office estimates that the company owes over $20 million. Both companies declined to comment.