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Payday Loans: Congressional Hearing Provides Forum

[Apr 3, 2009.]


Yesterday (April 2nd) afternoon, the House Subcommittee on Financial Institutions and Consumer Credit held a hearing on one of its bills, the Payday Loan Reform Act of 2009 (H.R. 1214). It provided a useful forum for debate for both sides in the great payday loans debate, and a full video of the hearing can be viewed online.

Payday Loans' Growing Popularity

Owing to space constraints, today's blog will cover only a few of the more telling points made by committee members during the opening minutes of the hearing. Future blogs will cover arguments made by witnesses who were advocates both for payday lenders, and consumer groups.

In his opening statement, hearing chairman, Rep. Luis V. Gutierrez, provided an overview of the payday loans industry. He pointed out how quickly it had grown. Payday lenders had only about 300 outlets across the country back in 1992. In 2008, there were 24,000.

Payday Lenders and State Regulation

In continuing, he described the wildly varying regulatory framework across different states. A few have banned payday lenders altogether; many have capped APRs (annual percentage rates) at 391 percent; up to 23 have either no cap or one that is very high. The congressman cited Missouri's cap of 1,955 percent as an example, and said that number of Americans who have little or no protection from predatory lenders is almost 113 million.

The Payday Loan Reform Act of 2009 seeks to introduce a nationwide cap of 391 percent, and restrict the rolling over of loans, although individual states will remain free to introduce tougher restrictions.

Freedom for Borrowers

Rep. Jeb Hensarling was among those who oppose the measure. He argues that the bill erodes risk-based pricing, and fears that consumers will lose choices, and economic freedom. He pointed out many would find it cheaper to take out a small payday loan than to pay $50 to reconnect their telephone, $100 to reconnect their cable, or bank charges that average $28.23 for a bounced check, and $56 in overdraft fees.

His colleague, and fellow Republican, Rep. Erik Paulsen, referred to a report by the Federal Reserve Bank for the state of New York. He said: "The study found that people in those states that had banned payday loans bounced more checks, filed more complaints against lenders and debt collectors, and filed for bankruptcy at a higher rate."

Payday Loan Protection--But No Panacea

Rep. Gutierrez summed up his position thus: "I recognize that my bill is not a cure-all for this issue. My intent with H.R. 1214 is to give the efforts to protect consumer rights a boost by creating a minimum level of protection that all consumers will enjoy."


About Author:

Peter Andrew has been writing about -- and for -- business for more than two decades. For the last couple of years, he has found himself increasingly specializing in the U.S. financial sector.

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