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Delaware moves to limit payday loans

Danielle Friedman, campaign manager with Statewide Poverty Action Network in Washington State, is happy with a bill the legislature in that state passed in early 2010 to curb payday lending.

“We think it’s been very successful,” said Friedman, whose group pushed for a law to curtail these short-term loans that had proliferated in the state.

Since its passing, the total number of such short-term loans have plummeted, from 3 million in 2009 to 1 million in 2010, the year the law took effect, she pointed out.

Washington State’s law limited the number of such loans an individual could take out to eight per year and it also set up a database to provide information, for the first time, on how many borrowers were taking out the loans and details about the loans.

The legislation was used as a framework for Delaware lawmakers when crafting a payday-lending bill here, H.B 289, which has been approved by both the State House and Senate and now awaits Gov. Jack Markell’s (D) signature.

What Washington experienced provides a peek into what the First State may see when the legislation becomes law, making consumer advocates who despise such loans satisfied and the industry that profits from them unhappy.

The law in Washington acts as a “circuit breaker,” Friedman maintained, in the cycle of perpetual borrowing many payday consumers find themselves in.

Delaware’s bill goes even further than Washington’s in terms of limiting borrowers to fewer loans. Here’s a summary of the legislation:

This bill limits to five the number of short-term consumer loans (sometimes called payday loans) that any one borrower may obtain in a twelve-month period. It changes the definition of short-term consumer loan to include loans up to $1000 rather than $500. The bill also provides for establishment of a database to track the number of short-term consumer loans an individual has obtained in a twelve-month period. Finally, the Banking Commissioner is directed to provide a report on the prevalence and nature of these payday loans to the General Assembly.

Legislators who sponsored the bill are using similar terminology used by Friedman when describing what the legislation is expected to do.

Sen. Colin Bonini

Sen. Colin Bonini discusses his support of payday loan legislation in Delaware.

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Delaware moves to limit payday loans

Sen. Colin Bonini (R), a co sponsor of the bill who describes himself as a pro-business legislator, said the legislation would help: “Many many Delawareans who get caught in the cycle of consistent debt. What this will do is hopefully short-circuit that cycle of consistent debt that a lot of Delawareans are finding themselves in. But at the same time, I also think this bill isn’t so hard that it’s going to drive anybody out of business.”

He called the bill “common-sense legislation” and stressed he wasn’t looking to outlaw the product.

Payday loans, which came on the scene nationally in the 1990s, are basically short-term loans with exorbitantly high, often triple digit interest rates. To obtain such loans an individual can go to a payday lending store or go online, pay a fee and then write a postdated check to the firm with the promise that they’ll pay back the money on their next payday, hence the name payday lending.

Payday loan storefronts have become a common sight throughout the state of Delaware, but the industry operates without the same strict oversight that banks operate under. Indeed, the main government agency in the state, the State Bank Commissioner, can’t even say for sure how many such shops are conducting business in Delaware.

The state doesn’t have a separate license for payday lenders, said State Bank Commissioner Robert Glen. “We do track which licensees are making short-term consumer loans, and we currently have 70 different licensees making short-term consumer loans.”

According to Paul Calistro, executive director of West End Neighborhood House, who has done his own research on such establishments, the state is now home to 350 payday-lending locations.

Calistro makes no bones about his disdain for payday lending.

“It’s poison,” he said. “They’re extorting the poor and making their financial situation worse because people are desperate.”

In his work, he continued, he’s seen thousands of families in the last decade that turned to payday lenders in a time of financial crisis and got into a cycle of debt they couldn’t get out of. Many, he added, ended up paying three to four times the value of their initial loans.

Theodore Connolly, co author of “The Road Out of Debt” and a bankruptcy lawyer for Looney & Grossman in Boston, said payday lenders do provide consumers options when it comes to getting short-term loans when they’re in a bind. But, he said, “It’s a very easy way to get yourself in over your head.”

States across the country have been implementing or considering ways to reign in such lenders, but the industry maintains that there’s a lot of misinformation out there when it comes to the services they provide communities.

Jamie Fulmer, a spokesman for Advance American, one of the biggest payday lenders in the nation and operators of 20 locations in Delaware, said critics unfairly inflate the interest rates they charge by applying an annual percentage rate to their calculations.

“We have to avoid the temptation that puts these in a vacuum,” he explained. “You have to look at the whole playing field consumers have to choose from and make sure you have a consistent set of rules.”

Fulmer called the legislation in Delaware “arbitrary” and “divorced from the landscape” of what’s really going on.

He sees his industry as giving consumers options beyond the banks that often charge hefty overdraft and bounced-check fees.

“It’s an elitist argument to assume that honest hard-working middle income Americans, and folks in Delaware specifically, are not smart enough to make their own financial decisions,” he stressed.

“When you start cherry picking arbitrary limits, whether it’s the number of loans, you don’t focus on policy. That’s all about politics,” he continued. “We were willing to accept a whole host of restrictions but instead they decided consumers aren’t smart enough to have more than five loans a year, so they cram this limit down their throats.”

Rep. Helene Keeley

Rep. Helene Keeley outlines the issues her payday loan legislation addresses.

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Delaware moves to limit payday loans

The main author of the state’s legislation Rep. Helene Keeley (D) pointed out that many consumers don’t use the payday lending products the way they’re touted.

“Only 2 percent of people that take out a payday loan pay it back,” she said, adding that the average payoff is more than 250 days in a year.

A key part of her bill is the establishing a database, she said, in order to lift the veil off the industry. “By gathering the data,” she added, “we are going to have a better understanding at how much these people are charging and what’s the interest rates. In most cases they hide it and its over 700 percent. In the data we’re going to be able to go back in year, year and a half from now and look at it and say, ‘ok what do we do from here?’”

She admitted, however, that the state might end up not doing anything with the data. “There may not be an appetite in Delaware to do away with payday loans,” she said such as surrounding states have done, including Maryland, New Jersey, and Pennsylvania.

Some see curbing payday loans as a broader issue for the state’s economy.

“We see this as an industry that’s preventing the Delaware economy from getting to the level it should be,” said Greg Wilson, communications director for the Delaware Community Reinvestment Action Council, Inc.

Payday lenders, Wilson pointed out, used to be a fixture mainly of lower-income neighborhoods but now the industry has spread into middle-class towns. “The money is being siphoned out of the real economy, rolling over into loans, paying triple digit interest rates,” he noted. “That would be money Delawareans could be spending at local stores, restaurants, or saving for college or a car.”

Wilson said the industry says they are providing life preservers to people struggling to make ends meet, but he see is as “throwing an anvil to a drowning man.”