THE Washington Legislature is the subject of more than its fair share of criticism, but we should recognize that it passes laws that protect the public and save us money. For example, in 2010, limits placed on payday lenders trimmed the debt load that overwhelms our poorest residents and improved our economy.
Unfortunately, payday lenders are campaigning to repeal this law. Since 2010, the political contributions in Washington by just one payday lender, Moneytree, and its executives totaled more than $200,000. Users of payday loans and their advocates do not have the resources to make similarly sized political contributions, but they are able to show the new law’s benefits and that the arguments for repeal are flawed.
Payday loans, which have an average annual interest rateof more than 360 percent, do not harm only borrowers. Often borrowers have to turn to public programs for help with housing, food, health care and emergency needs when they are forced to use their limited resources to pay exorbitant interest.
Concern over high-interest loans is not new and usury laws have ancient roots. Twelve percent was the limit during the Roman Empire and by 1886 every state in the nation recognized the wisdom of limiting interest rates.
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We sometimes forget the lessons of history. In 1995, a payday-loan exception to Washington’s 12-percent usury law went into effect. The rationale was that there is a need for a short-term financial solution for emergency expenses. It was also argued that borrowers wouldn’t pay substantial interest, despite a high annual percentage rate, because of the short duration of the loan. It may be a good story in theory, but for many borrowers, sadly, it is not true.
Instead of taking a one-time, short-term loan, many payday-loan borrowers fall into a cycle of long-term, high-cost debt. Payday loans are expensive and come due quickly. As a result, borrowers are compelled to take out another loan to pay off the first and the cycle repeats. The short-term loan becomes a long-term loan at triple-digit interest rates — a problem aptly named the “debt trap.”
The 2010 law reduced the “debt trap” problem, but did not outlaw short-term payday loans. To reduce the impact of repeat borrowing, the Legislature limited the number of payday loans to eight per year, per person, and provided borrowers with the right to convert their payday loans into installment loans.
As a result, payday loans made in Washington have dropped from more than 3 million in 2009 to fewer than 1 million in 2011.
Moreover, the 2010 law does not have the three adverse side effects that the payday industry asserts for its repeal.
First, a recent Pew Charitable Trusts study concluded that restricting storefront payday lenders does not drive payday-loan customers to Internet lenders. And even if regulation did increase online payday lending, Washington consumers already have protection from unregulated, online payday lenders. A borrower can terminate the lender’s access to his or her bank accounts and the unlicensed payday lender is barred from bringing a collection action in Washington courts.
Second, those who really need a short-term loan still have the option of taking a payday loan. In fact, in any year they can take out eight payday loans.
Third, regulation of the payday loan industry does not hurt our economy. Payday lenders prey on low-income customers who don’t have money to save or invest. As a result, money saved from excessive interest is put back into our economy to pay for rent, food, medical care and other necessities.
The state and public is best served by maintaining our current limits on payday lenders.
Attorney Fred Corbit serves as senior attorney at the Northwest Justice Project and as an adjunct professor at Seattle University Law School. The views expressed are his own.