Bolton: Payday borrowers beware
01/31/2010 12:00 AM
01/29/2010 6:16 PM
NEW PAYDAY loan regulations that lawmakers touted as a way to protect consumers go into effect Monday, but early signs are that borrowers had better take steps to protect themselves.
Things are going to get worse - potentially much worse - for many borrowers before they get better, if they ever get better.
Things will worsen because - just as they did when they first sanctioned payday lending back in 1998 - lawmakers left holes in the new law that lenders can - and likely will - exploit. Trapped borrowers can either sit back and take it or take control and step out of the payday lending cycle.
Unfortunately, there hasn't been a lot of exposure given to the burdens the new law could heap upon borrowers - particularly those with multiple loans.
In an effort to protect borrowers from getting caught up in a cycle of debt created by repeated, multiple high-interest loans, lawmakers limited consumers to one loan at a time. But they made no provisions as to how lenders are to settle affairs with the many consumers who have multiple outstanding loans.
So, borrowers with six, seven and even 10 or more loans - I've heard of people having as many as 22 - are about to feel the wrath of payday lenders. With no rules on how to deal with outstanding loans, look for lenders to begin making a run on the bank, so to speak.
As credit union officials have described it to me, payday lenders arrive at banks and credit unions with a stack of checks they've been holding from borrowers, looking to cash them and to get what's due them. The problem for borrowers with multiple loans is that all those lenders they gave checks to hold in exchange for a payday loan will be attempting to cash the checks at the same time.
If they've got the money in the bank, fine. But anyone with 10 outstanding payday loans won't have the thousands it's going to take to pay them off at once. If the money isn't there, the checks bounce, and the borrowers get hit with insufficient funds fees.
If they were wise, instead of making a run on the banks, payday lenders would work out arrangements to give those with outstanding loans an opportunity to repay the principal and get out from under the onerous triple-digit-interest agreements. Not only would they be repaid, but they would earn a bit of good will, something they lack.
Short of that, borrowers should protect themselves. Over the years, I've talked to credit counselors and advocates who shared with me a way out for people badly ensnared by payday lending: Stop payment on checks being held by the lenders - or even shut down your account if you must. Although some lenders have reportedly threatened prosecution, taking such steps is not a crime. In most cases, the borrowers will have paid the principal many times over in interest. Those who want to repay the principal - and I think they should - should call the lender and work out a way to do so - without the onerous interest.
Either way, borrowers should abandon payday lending forever. From that point on, they must do a better job of budgeting and managing their money, live within their means, do without or seek help from family and friends.
Apparently, lawmakers were so caught up in trying to pass the new law that they didn't see this disaster coming. And that's not the only flaw in the new law.
Legislators also failed to specifically address how the new database is to be populated initially. If the idea is to limit each borrower to one loan at a time, common sense tells you that anyone with even one existing loan must be entered into the database prior to its going into effect.
Some lawmakers think it's clear that lenders were to input outstanding loans to the system. But the lenders dispute that, saying the law doesn't require it.
There was hope that lenders could be forced to comply pending an opinion requested from the office of state Attorney General Henry McMaster, a gubernatorial candidate who has been most prolific over the past few years when it comes to raising campaign funds from payday lenders.
But the opinion, dated Jan. 11, came back in payday lenders' favor. It said that while the law doesn't spell out that the information must be input prior to the database coming online, lawmakers' intent for that to happen was clear. But the opinion also noted that the law states that borrowers must receive prior notice from lenders that their information is going into a database. Noting lawmakers' desire to protect borrowers and the absence of anything in the law requiring lenders to notify consumers that existing information would go into the database, the attorney general's office said that it is "constrained" from concluding that the law requires outstanding loans to be entered into the database. It says that if the law isn't clarified by lawmakers or the courts, only new transactions conducted after the database goes into effect should be input into the system.
Lawmakers seem content to accept the attorney general's opinion. Many don't want to reopen the payday lending issue, particularly in an election year.
But they should have, at the least, pushed back the start of the database and required existing data to be input. Allowing things to proceed as is defeats the purpose of the law. When the database kicks in Monday, borrowers with outstanding loans - whether one or 21 - will be at or above the state limit, but will be eligible for another loan.
So the multiple-loan problem gets worse before it gets better.
Sen. Wes Hayes, who has worked diligently with others to protect consumers, said it's unfortunate that lenders will get to pile one more loan on top of borrowers. But, he said, that will work itself out over time.
"The thing that I regret is we will never know the extent of the multiple loan problem," he said.
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