With 239,000 Alabamians using payday loans, Alabama Sen. Arthur Orr wants industry reform

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HUNTSVILLE, Ala. - The Alabama Legislature is again poised to take up reform of the payday and title loan industry after a similar effort died on the last day of the session in 2016.

Alabama Sen. Arthur Orr, R-Decatur is leading the fight in the Senate.

The use of such loans is widespread in Alabama.

Dr. Neal Berte, president emeritus at Birmingham-Southern College, spoke at a media event Monday at Redstone Federal Credit Union in Huntsville on the need for reform.

“Alabama is really and truly, in many ways, the worst of the states that have not made major reform in both payday and title loan lending,” Berte said.

Advocates for reform say the average interest rate for the payday and title loans in Alabama is 300 percent, but with refinancing and missed payments, that rate can get as high as 456 percent.

The Alabama State Banking Department established a database for payday loans and for the period between Oct. 1, 2015 and Sept. 30, 2016, the figures show there were more than 2 million payday loans taken out, with $668 million borrowed by 239,000 people in Alabama.

Orr stresses he’s not trying to put the payday loan companies out of business or end the practice of allowing people to borrow money with their car titles, but he’d like to see a more balanced approach.

Orr is sponsoring Senate Bill 284, which would end the practice of pawn shops being able to make title loans. One of the challenges for borrowers is the short windows where they have to pay back their loans.

Orr said his bill would address that problem.

“On the payday lending side, we take the minimum payment that now can be required of anywhere from 10 to 31 days -- have a minimum of a month to repay the loan,” he said. “Because what happens, people will get a two-week loan, and then as they don’t pay the full balance, they refinance and refinance, and then they’re paying interest on interest and it snowballs out of control and is really oppressive to the borrower.”

Alabama Rep. Anthony Daniels, the House minority leader, said he knows the loans can cause serious hardship.

“This issue is a new issue to me on the policy side, but it’s certainly not a new issue when I hear of stories from family members, friends and constituents that have been, that have gone out and gotten payday loans and have a very difficult time trying to get themselves out of debt,” Daniels said.

Daniels said he wants to see reform happen this year. He said there’s at least one bill in the Alabama House – House Bill 321 – also addressing the issue. HB 321 would cap the maximum interest rate on certain loans and other financial transactions at 36 percent.

Orr’s bill doesn’t cap rates at 36 percent. The senator said he’s trying to strike a balance between allowing borrowers quick access to ready cash and reining in high fees and rates.

The interest rates grow as borrowers refinance the loan they’ve been unable to pay. State banking figures show payday loan companies collected $116 million in fees during the 2015-16 period.

Given the difficult challenge of ever catching up on the loan, why would borrowers take those kinds of risks?

Joe Newberry, President and CEO of Redstone Federal Credit Union, said the credit union has done studies of its 390,000 members. Newberry said 40,000 of its members have payday or title loans.

“I think they see ‘em on every street corner,” Newberry said. “And what we see is they’re desperate and they don’t think about credit unions and other financial institutions that can help them.”

He said Redstone Federal Credit Union began offering small loans, with less traditional credit underwriting at $500 over a six-month repayment schedule. Newberry said potential borrowers can visit the credit union’s website, visit a branch or call Redstone to get more information.

Don Gowen, a retired consumer lender said he’s seen the problems grow in Alabama over the past 15 years. Gowen said the lending industry has spent millions of dollars lobbying and donating to candidates to prevent meaningful reform.

He said many of the borrowers are people short of funds, faced with an emergency.

“Take a title pawn loan,” he said. “And a gentleman borrows a $1,000 on his automobile for one of his relative’s funerals.”

The process is pretty quick, much faster than the usual bank loan process. But, then the bill comes due.

“He will have to pay that loan back in 30 days, so that means that he’s got to pay $1,000 back, plus 25 percent interest, that’s $1,250 in 30 days,” Gowen said. “If he didn’t have $1,000 to start with, it’s going to be hard to pay $1,250 back.”