Backed once again by a coalition of community groups, anti-poverty advocates and religious leaders, Rep. Frank G. Ferri and Sen. Juan M. Pichardo are again introducing legislation aimed at freeing Rhode Islanders from a cycle of debt caused by ultra-high-interest payday loans.
The legislation (2014-H 7285), which was introduced in the House last week and is expected to be introduced in the Senate this week, eliminates a special exemption from the state’s usury law that has allowed payday lenders to charge borrowers interest rates as high as 260 percent. The legislation would not prohibit payday loans themselves; it would simply make them subject to the same interest limits as other loans.
“Why are we giving special treatment to payday lenders? We’re helping them prey on the poor. Payday lenders want people to believe they deserve an exception because they’re providing some valuable public service that helps people who are scraping by paycheck to paycheck, but in reality, their outrageously high interest rates are pushing the needy deeper into debt, very quickly. It’s just plain usury,” said Representative Ferri (D-Dist. 22, Warwick) in a statement.
Said Senator Pichardo (D-Dist. 2, Providence), “The federal government has already recognized the harm that payday lenders do, and have banned them from targeting military members. Twenty-one other states, including most of our neighbors in New England, plus Washington, D.C., have also said no to these predatory lenders with meaningful limits. Rhode Island can’t go another year without taking action on payday lending. The longer we wait, the more people are becoming trapped in debt by these irresponsible, destructive lending practices.”
Ferri and Pichardo’s legislation would strip the exemption for cash-advance lenders, making them subject to the same usury laws that govern other lenders with annual interest rates limited to 36 percent. A similar federal law applying to active military members and their families was enacted in 2006 after the Department of Defense determined that payday lenders’ predatory practices were harming military members. That bill also capped interest rates at 36 percent. Seventeen states, and Washington, D.C., have similar laws capping interest rates, many at 36 percent, according to the Center for Responsible Lending.
The sponsors said there are much better alternatives to payday loans that would remain available if payday lenders were to pull out of Rhode Island. There are local financial institutions that will provide small short-term loans, including the nonprofit Capital Good Fund, which is aimed at breaking the cycle of poverty and provides financial coaching to borrowers to prevent them from being crippled by debt.
According to a report by the Pew Charitable Trusts, 81 percent of people who use payday loans say they would cut back on personal expenses if payday loans were unavailable to them. The same report states that in states that restrict payday lenders from operating storefronts or have interest caps low enough to eliminate the industry, 95 out of 100 would-be payday loan borrowers do not borrow at all. Only five in 100 turn to online payday lenders or borrow from another source.
The Pew report also found that 69 percent of borrowers said they sought their first payday loan not to pay for an unexpected expense or emergency, but to cover ordinary living expenses. According to the report, the average borrower takes out eight loans over the course of the year, averaging $375 each, with a total of $520 in interest annually, and is in debt to payday loans five months out of the year.
The Insight Center for Community Economic Development last year estimated that for each dollar of payday lending interest paid, an estimated 24 cents is lost to the U.S. economy. That report estimates that the Rhode Island economy loses $1,649,522 in that manner every year because of the payday lending industry.