LINCOLN — Glenda Wood said she had no way of knowing the $500 postdated check she cut to get her hands on a payday loan in 2006 would take nearly a decade to get out from under.
First came the new set of tires. Then some unexpected home repairs. After that, medical bills — also unexpected.
On top of routine household expenses and student loan payments, Wood said the “payday loan trap” ensnared her and her family, and so the married mother of three took to the Nebraska Legislature’s Banking, Commerce and Insurance committee on Tuesday to support a proposal that would reduce the effective interest rate on such loans by an order of magnitude and stretch out the repayment period.
“We estimate we spent close to $10,000 paying back that original loan” for new tires, Wood said Tuesday, saying they took out small loan after small loan. “We felt exploited, trapped, powerless and unable to find a way out of the cycle.”
Sen. Tony Vargas of Omaha said the overhaul floated in Legislative Bill 194 would prevent other Nebraskans from falling into the same situation as Wood.
The bill, which also was supported by Sen. Lou Ann Linehan of Omaha, would replace the current 34-day maximum loan term with one that is subjective and based on a borrower’s ability to repay, capping monthly payments at 5 percent of a borrower’s gross monthly income; cap the maximum effective interest rate at 36 percent, down from the current level of 461 percent; and limit total interest and fees to 50 percent of the principal balance, so the most someone would pay to borrow $500 is $750
Other changes permit lenders to charge “maintenance fees” to soften the financial blow that would be sustained by companies like EZ Money, one of the largest such payday lenders in Nebraska, with nine locations across the state.
“Placing reasonable regulations on this industry won’t make these companies disappear,” Vargas said. “The protections will make our economies and communities stronger, putting millions of dollars back into consumers’ pockets.”
Brad Hill begs to differ. As president of the Nebraska Financial Services Association, Hill warned the legislative committee charged with oversight of laws affecting payday lenders of what happened in Colorado in 2010, when legislators in that state enacted a similar overhaul: Two-thirds of storefronts closed up shop, he said.
Julie Townsend, an opponent of the proposal who represents national payday loan operator Advance America, estimated that the South Carolina-based company closed half its stores in Colorado after the 2010 law passed, leaving it with about 20 today.
If the Vargas bill passed as written? “All 18 of our (Nebraska) centers would close,” Townsend said.
Hill invoked Armageddon when he considered such an outcome. “Forget about this being a job killer. It would be an industry killer,” said Hill, who is also area manager for EZ Money.
Its store count would fall to one, maybe two, if the bill were passed, Hill said.
The committee took no action on Tuesday, but it got plenty to chew on from both sides of the debate.
LB 194 supporter Nebraska Appleseed, a group that advocates for the poor, issued a seven-page report early Tuesday in which it analyzed violations of the existing state law regulating payday lenders between 2010 and 2015. Compared to other financial institutions under the Nebraska Department of Banking and Finance’s oversight, “payday lenders are an outlier” when it comes to consent orders in which violators of the law agree to remedy problems identified by the state, the report said.
“What we found confirmed that payday lending is indeed a problem under the current law,” said James Goddard, program director and staff attorney for Appleseed’s economic justice and health care programs.
Those businesses paid nearly $48,000 in fines associated with consent orders in 2016, said Nebraska Department of Banking and Finance Director Mark Quandahl in neutral testimony to the committee on Tuesday.
But payday borrowers lodged only one complaint against such lenders in 2014, and none in 2015 or 2016.
Nick Bourke is director of consumer finance for the Pew Charitable Trusts, which helped author similar legislation that last year failed to advance out of committee hearings. In his return to the Capitol on Tuesday to support LB 194, he said the law on the books today has failed.
“The idea is to correct it so we simply reform these loans so consumers can pay back a little at a time and get back on their feet,” Bourke said.
Even though scores of storefronts shut their doors in response to the Colorado law, those that stayed in business got more business as markets right-sized themselves, Bourke said. He maintained that access to low-dollar, high-interest rate credit has not been affected by the change and said similar changes can work in Nebraska.
But the interest rate reduction alone is enough to drive lenders out of business, said Hill and Paul Bencker, owner of AP Check Cashing in Omaha, who maintains that extrapolating an APR on a loan with a term of two weeks to one month at most is patently unfair. State law permits such lenders to charge borrowers $15 per $100 loaned, which would equal about 461 percent interest — but only if the term were an entire year.
Instituting a 36 percent interest rate as written would slash that fee to $1.38 per $100 borrowed.
Bencker, Hill and others in the industry have been prepared for the worst since well before last year. That’s when the federal Consumer Financial Protection Bureau issued a long-awaited rule that they say could also put them out of business, mainly by imposing strict requirements to ensure borrowers’ ability to repay and limiting how many loans borrowers can take in a 12-month period.
Despite assurances that such capital would remain available to less-than-creditworthy borrowers, payday loan fans like Virgil Parks Jr. of Omaha are less certain. Those borrowers know what they’re getting into, Parks said, or at least they should: After all, the loans are essentially unsecured and approved with little more than a photo ID, a pay stub and a postdated check.
“If I loan someone money, what collateral do I have?” Parks said.
The committee later heard testimony for LB 286, sponsored by Sen. Joni Craighead of Omaha, which would create a new loan option for Nebraskans that provides more flexibility than traditional, short-term payday loans. Loans made under the proposal would be capped at $2,500, with payments spread equally over a maximum term of 24 months.
They would carry an interest rate no higher than 18 percent with no early-payment penalties.
Another proposal, LB 386, from Sen. Brett Lindstrom of Omaha, would extend the period payday lenders can hold borrowers’ checks to 40 days from 34 days.
This report includes material from the Associated Press.