Senator Introduces Alabama Payday Loan Reform Legislation
Inside Subprime: Feb 20, 2019
By Lindsay Frankel
Alabama state senator Arthur Orr has brought legislation in Montgomery designed to curb predatory Alabama payday loans. The bill would limit interest rates on payday loans in Alabama and allow borrowers a 30-day repayment term.
“We do our mortgages every 30 days, our credit card payments every 30 days, car payments, it’s what the borrower is used to. Why not allow it in this situation,” Sen. Orr said.
Alabama has the third-highest concentration of payday loan storefronts in the country, according to a 2016 study. And data from Pew Charitable Trusts shows that payday loan providers in Alabama are charging an average APR of 461 percent, due to permissive laws regarding interest rates. The combination of short terms and high interest rates makes it difficult for borrowers to pay back these risky loans, leading to a long-term cycle of debt.
That’s what happened to Mike Soto, who took out a payday loan when he experienced a decrease in income. Work had slowed, and he was recently divorced and raising two kids. Strapped for cash, Soto took out a payday loan to help manage his monthly expenses. But the debt he incurred quickly became unmanageable. “It was a quick fix. I ended up with one. Then I had two. Then I ended up with a third one,” Soto said. He was in debt for almost a year, until he was finally able to pay off the loan with the help of his tax refund.
And Soto is not alone. In just a year, 239,000 people took out more than 2 million payday loans in Alabama. State law doesn’t limit how many outstanding payday loans a customer may hold, and the CFPB found that 80 percent of payday loans get renewed or rolled over.
This isn’t the first time Senator Orr has introduced legislation that would extend the minimum term allowed for payday loans. He sponsored a similar bill in 2017, after similar efforts failed the previous year as well. Public opinion isn’t the problem – 70 percent of Americans want stricter restrictions on payday loans, according to a Pew survey – instead, high-powered lobbyists present an obstacle to getting the bill to Governor Ivey’s desk. Payday loans firms raked in $101 million in fees alone from Alabama residents last year, according to a report from Alabama Arise, and industry lobbyists will fight to keep the industry thriving.
But Senator Orr’s bill attempts to strike a balance between protecting consumers and keeping payday loans profitable. Some states cap interest rates on payday loans at 36 percent, effectively putting payday loan storefronts out of business. Orr said he’s just trying to ease the financial burden on the consumer. “The legislation I carry is not to put the payday lenders out of business. It’s not to ban the product. But it is to give the borrower a little more time to repay the loan,” Orr said.
Orr plans to re-introduce the bill, which died in the House last spring, in Montgomery next month.