IT SHOULDN'T surprise anyone that payday lenders already have begun poking holes in South Carolina's new law meant to regulate them.
That's because these deep-pocketed, influence-peddling loan sharks don't play by the rules: They stretch, skirt and dodge them. They don't intend to allow the new law to prevent them from continuing to strip millions from poor S.C. workers.
While the minimal regulations S.C. lawmakers passed last year to protect consumers didn't go near far enough - a ban is the only real solution - many legislators saw them as an opportunity to keep the industry alive while giving - for the first time - at least some protections to borrowers.
But even before the law went into effect this month, lenders were already at work finding ways to exploit or avoid it.
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As I wrote on Sunday, the lenders refused to put outstanding loans - some people have six or eight or 10 or even more - into a mandatory statewide database. The key protection in the new law is its limit of only one outstanding loan of no more than $550 at a time.
The lenders know it was lawmakers' intent for those who had outstanding loans to be placed in the database so they wouldn't get deeper in debt. But poor wording of the law and a favorable attorney general's opinion assured the lenders of being able to saddle even the most indebted borrower with at least one more loan, despite the fact they're already at or above the new one-loan limit.
State Sen. Wes Hayes, one of several lawmakers who have worked hard to protect consumers, said there's little appetite to open up the payday lending law itself to address that specific concern, but that some legislators want to head off a potentially bigger problem: an attempt by some lenders to drop their payday lending licenses altogether and apply to become small consumer loan businesses - while essentially still offering payday loans.
"It's just changing the business model just a little bit so they can continue business as usual," Sen. Hayes said.
If payday lenders are able to become "supervised lenders," they could become more potent and predatory. Under state law, supervised lenders, such as title lenders, can charge any interest rate they want as long as they are licensed, notify the state and post the rate. Frankly, it's absurd - and ought to be illegal - for title loan companies to be allowed to charge any amount of interest they wish on loans above $600.
When lawmakers carved out a special place in the law allowing legalized check kiting in 1998, they didn't foresee payday lenders becoming supervised lenders. Payday lenders were happy to operate under the law adopted expressly for them as long as there were no consumer protections; there were no caps on the number of $300 loans they could make and no database to report to.
True to form, instead of accepting the restrictions some payday lenders began looking for loopholes. Understandably, lawmakers are worried the industry will find a way as supervised lenders to continue the predatory practices the loan caps and database are meant to rein in. It certainly would be unconscionable if payday lenders - already allowed to charge nearly 400 percent on loans - are able to offer two- to four-week loans just over the $600 limit at outrageous percentage rates.
It's quite possible that some payday lenders really want to change their stripes and offer six-month and year-long small loans.
But some advocates and lawmakers doubt that. So do I.
Those lenders who are for real shouldn't mind legislation that prohibits payday-type loans being offered under a supervised lender's license.
Sen. Hayes said he believes a number of payday lenders intend to seek the new licenses but that they shouldn't be able to do so simply to circumvent the new payday law. The York senator said some of the key players in the payday industry, such as Advance America, have chosen not to switch their licenses.
"I think that those (lenders) that are playing by the rules are just as concerned as I am," Sen. Hayes said.
Anyone who's observed the payday industry for any amount of time would have anticipated this. The lenders have done similar things in other states that have tried regulating them. For example, when Ohio enacted a 28 percent interest cap on payday loans - outlawing the 391 percent rate South Carolina continues to allow - the lenders began getting around the 2008 law by doing business under two older laws: the Ohio Mortgage Loan Act and the Small Loan Act. The switch allowed the lenders to increase loan amounts and ratchet up fees. Some were reported to be offering 14-day loans at an interest rate of 680 percent.
The effort to switch licenses in South Carolina was led by Check into Cash, which announced late last year it would convert 12 of its stores to small consumer loan businesses. As of last week, nearly 100 payday lending locations - 93 to be exact - had switched to supervised lender licenses.
State lawmakers, particularly those who fought for minimal restrictions in an effort to keep payday lending alive, should be offended by the industry's actions.
A Senate subcommittee will meet this morning to consider a proposal that would prohibit payday lenders from obtaining supervised lending status only to continue business as usual.
Not only should the Legislature adopt clear rules outlawing the practice - with no wiggle room - but they also must send payday lenders a stern message:
Shape up or ship out.