MEMO - Community Action Project.doc by zhaonedx


									                                            Community Action Project         Phone 918.382.3200
                                            717 S. Houston, Suite 200        Fax 918.382.3213
                                            Tulsa, OK 74127        
Community Action Project

Date: June 1, 2004
To: Interested Individuals
From: David Blatt, Director of Public Policy
Subject: SB 1565, New Payday Lending Loan

         In 2003, the Legislature approved SB 583, which authorized deferred deposit lending –
known as payday lending – in Oklahoma. After 8 months of legalized payday lending, the
Legislature has now approved a new bill, SB 1565, which amends the conditions under which
payday lenders can do business.
         Supporters of the payday loan business define the product as “one-time short-term loans
intended to cover unexpected shortfalls between paychecks”. However, SB 1565, like last year’s
bill, fails to propose the simple language needed to help ensure that payday lending in practice
conforms to that definition. While early versions of SB 1565 included key measures that would
have addressed some of the practices that lure borrowers into a cycle of repeated and chronic
borrowing , the final version of the bill bowed to industry demands and stripped these protections
from the bill. Instead, SB 1565 offers mostly window-dressing in the way of new protections for
consumers and in some key respects would make it even harder for the most financially strapped
consumers to get off the payday loan treadmill. All things considered, we conclude that
Oklahomans would be better off under current law than under SB 1565. SB 1565 should be
rejected with a strong recommendation that all sides be brought together next year to produce
legislation that will curtail abusive lending practices and help those most in need.
         This memo provides background on payday lending in Oklahoma, looks at the provisions
that are included and are absent from SB 1565, and suggests why Oklahoma will be better off
maintaining current law.

    1. Payday Lending in Oklahoma
    Payday lending is a huge, booming, and highly profitable industry nationally. Where
virtually no payday loan outlets existed 10 years ago, there are now an estimated 10,000 payday
loan shops nationally, generating fees of some $2.4 billion a year and providing a return on
investment close to 35 per cent a year1. The industry is dominated by a handful of national firms
that have aggressively worked to overturn state laws banning usurious interest rates so as to be
allowed to do business.
    Until passage of SB 583 last year, payday lending was illegal under Oklahoma law. With SB
583, lenders were able to get a license allowing them to make loans for as little as 13 days at
interest rates as high as 421% APR (Annual Percentage Rate). The bill prohibited direct renewals

 Data from Michael Stegman, “Payday Lending: A Business Model that Encourages Chronic Borrowing,
Economic Development Quarterly, February 2003. Available at
of loans, limited borrowers to two outstanding loans at a time, and prohibited anyone from taking
out more than five loans in a 90-day period until they had undergone consumer counseling.
    Since SB 583 took effect, the Department of Consumer Credit has issued licenses to 380
deferred deposit lenders. Of these 380 outlets, 94%, or 358, are owned by out-of-state
companies. The 13 chains with the most number of outlets are all headquartered out-of-state;
together these 13 alone represent 85% of the market. Essentially, payday lenders are draining
dollars from Oklahoma’s most financially vulnerable neighborhoods to the benefit of companies
based in Tennessee, South Carolina, Ohio and Texas.
    The payday loan industry claims to provide a vital service by serving as an occasional source
of convenient cash in an emergency. But the evidence strongly suggests otherwise, that payday
lending is a business model built on developing and sustaining a customer base of repeat and
heavy users. A recent national study found that 91% of all payday loans are made to borrowers
who take out more than 5 loans in a year and that borrowers, on average receive 8 to 13 payday
loans per year.2 We do not yet have reliable or comprehensive data on the extent to which
customers in Oklahoma are using payday loans repeatedly, as the law was allowed to take effect
nine months before implementation of a database that is intended to track lending activity. But
we do know that within 7 months of SB 583 taking effect, over 9,000 borrowers contacted
Consumer Credit Counseling Services of Central Oklahoma seeking the certificate that the
current law requires for anyone seeking a 6th loan in less than 90 days. In all likelihood, that
population reflects only a fraction of the total number of addicted borrowers since there’s no
mechanism in place to track loans a borrower may have taken out from a different lender.
    The volume of heavy borrowers seeking counseling certificates absolutely overwhelmed the
state’s consumer counseling service providers. For a while, Consumer Credit Counseling
Services of Central Oklahoma (CCCS) was simply handling certificate requests by sending a
form back and forth by fax. Last month, this practice was judged as out of conformity with the
law’s counseling requirements. Since April, no agency will routinely provide heavy users with
the certificate needed to continue borrowing within the 90-day period, although CCCS in Tulsa
will serve borrowers who choose to participate in their standard counseling program. As a result,
most borrowers are being required to wait for the 90-day period to expire before starting the
cycle of borrowing again.
    This extended waiting period on the most heavily addicted borrowers is what prompted the
payday loan industry to push hard for repeal of the counseling certificate requirement in current
law. Unfortunately, with SB 1565, the industry got its wish.

   2. The Evolution of SB 1565
   Although SB 1565 was introduced as basically a shell bill, the committee substitute that Sen.
Monson introduced in the Senate Finance Committee did two important things:
         It responded to the concerns of consumer advocates by limiting borrowers to a single
         outstanding loan and requiring a 24-hour waiting period between paying off one loan
         and taking out another;
         It imposed these same limits on “supervised loans”, or B-loans.
After a concerted outcry from the B-loan industry, SB 1565 was amended on the Senate floor to
remove the substantive language affecting that industry in favor of a legislative study. This

 Center for Responsible Lending, “Quantifying the Cost of Predatory Payday Lending”, December 2003. Available

version of the bill made it through the Senate and then passed the House overwhelmingly, 95-4.
Consumer advocates, including CAP, AARP-Oklahoma, the Oklahoma Institute for Child
Advocacy and faith-based organizations, worked hard to help the bill advance to conference.
        The bill that emerged from conference committee was substantially different than the
version that passed both houses. The two key reform measures – limiting bowers to a single
outstanding loan and requiring the 24-hour cooling-off period between all loans – were deleted,
replaced only with a new waiting period of up to 48 hours for a borrower after five consecutive
loans. The legislative study of the B-loan industry was also removed. In addition to gutting the
reforms that had been approved by both chambers on Third Reading, the enrolled version of SB
1565 includes several provisions requested by the industry:
          It deletes the requirement in existing law that a consumer get a credit counseling
          certificate before being able to take out a sixth loan in under 90 days (Section 7);
          It authorizes a new fee on borrowers for the full cost of the tracking and verification
          database (Section 5);
          It lowers the minimum term for a loan from 13 to 12 days (Section 4), The shorter
          the term of the loan, the greater the difficulty that many borrowers will have to repay
          on schedule. Along with the new database fee, the shorter minimum term raises the
          maximum APR of a payday loan to 469%.
The bill also contains some provisions that are touted as “groundbreaking measures that will
protect consumers, including:
          The option of an installment plan for borrowers after three consecutive loans. If
          accepted, the borrower would be able to pay off her loan over her next four pay periods
          and would be prohibited from taking out another loan until fifteen day after completion
          of the installment plan (Sections 3 & 6);
          A new fee of five cents per loan paid by the lender for consumer credit counseling
          education (Sections 8 & 9). The bill contains no language, however, specifying who
          this program will serve or how borrowers will be connected to the services
          Language emphasizing that payday loans made by electronic means, such as by
          phone or over the Internet, are subject to Oklahoma’s law (Section 2)

    3. Is SB 1565 An Improvement Over Current Law?
    The only argument in favor of SB 1565 is that the new provisions that allow for repayment
by installment plan and levy a five-cent per loan fee for consumer counseling are sufficiently
favorable to justify the entire package. These are indeed helpful ideas that can help certain
borrowers deal with unmanageable debt. The reality is, however, that no legislation is needed to
carry through with these provisions.
             Under current law, many lenders already can and do set up installment plans for
              borrowers in need. Lenders who want to work with clients to help them pay off
              their debts will do so regardless of specific legislative language. Conversely, the
              way SB 1565 is written, if a lender is not interested in helping the client set up an
              installment plan, it is unlikely that most borrowers will be well enough informed to
              benefit from this option;
             SB 1565 would charge lenders a nickel per loan for consumer credit counseling
              education. If every licensed lender in the state made 100 payday loans a week, this
              fee would generate $100,000. However, existing revenues from licensing of payday
              lenders going to the Department of Consumer Credit are more than adequate to

              fund such a program. Enough of a surplus had already built up in the Department’s
              Deferred Deposit Lending Fund that the Legislature this year transferred $200,000
              from the fund to Special Cash in HB 2056;
              According to the Department of Consumer Credit, remote loans are already
              subject to Oklahoma law. The language in Section 2 of SB 1565, while helpful, is
              not necessary to allow the Department to require remote lenders to follow our laws.
        The final version of SB 1565 stripped the reforms that had been approved in earlier
versions of the bill and were widely acknowledged to be vital for slowing down the payday
lending treadmill because, as supporters acknowledge, “the industry could not live with that”.
The bill lowers the minimum loan term, burdens borrowers with a new fee, and most
significantly, removes the one provision in the existing law – the five loan maximum within 90
days – that is keeping a real check on unfettered lending.
        Without a new bill, the five-loan in 90 days limit will remain in place. The industry and
consumer credit counseling providers may develop and fund a voluntary approach to provide
counseling services to heavy borrowers that will allow some to obtain the needed certificate.
Otherwise, borrowers will simply hit a wall and be forced to go without a new loan until the end
of the 90-day time period. This will put brakes on the pattern of reckless and unconstrained
lending that is exacerbating the financial problems of so many families. This, more than the
proposed language in SB 1565, will encourage lenders to work with borrowers to develop
responsible and manageable borrowing plans. No one using payday loans as they are ostensibly
intended – as an occasional source of help for an emergency – will be remotely inconvenienced.

        4. Conclusion
        In each of the last two years, the Legislature has passed a bill that mostly reflects the
interests and demands of the payday lending industry over the objections of advocates for low-
and moderate-income working families. The final product each time has rejected proposals that
would lower the cost of these loans and help keep those in need of financial cash from getting
dragged onto a treadmill of growing debt. By vetoing SB 1565, Governor Henry has the
opportunity to avoid enactment of legislation that will make a bad situation even worse and send
a clear show of support to financially vulnerable families.


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