In Birmingham today, President Barack Obama praised proposed new federal regulations on payday lenders, but a separate battle over regulations is expected in the Alabama State House.
The Consumer Financial Protection Bureau, which the president talked about today, has no authority to reduce the interest rates in Alabama, where payday lenders can charge fees that equate to annualized rates of up to 456 percent.
Consumer advocacy groups and others say the charges are outrageous and squeeze consumers who are barely scraping by.
Payday lenders, on the other hand, say they provide what customers can't get elsewhere, a quick, short-term loan for a few hundred bucks, an alternative to bounced checks during emergencies.
The debate plays out annually in the Alabama Legislature, and so far, the lenders have prevailed.
Stephen Stetson, a policy analyst for Alabama Arise, which advocates for low-income families, said he's expecting legislation again this year that would cap annual rates at 36 percent.
Sen. Arthur Orr, R-Decatur, will try a different approach this year, saying that the 36 percent proposals have essentially gone nowhere.
Orr's bill, based partly on Colorado's law, would set a six-month minimum term for payday loans, which now can be as short as 10 days.
Orr said the longer term will help stop rollovers, which some critics of payday loans say are the real problem, trapping borrowers in a long-term spiral of debt.
Customers who can't pay their loan off when it's due instead pay fees to extend the loan, making no progress on repaying the principal.
Orr calls his proposal a middle ground approach that has not put lenders out of business in Colorado.
He said 115 percent would be the maximum APR for a six-month loan under his bill.
Max Wood, who owns payday loan stores and is president of Borrow Smart, which he said represents more than 300 storefronts in Alabama, said Orr's bill would drive many lenders out of business
because the rates would be too low.
Wood said the triple-digit rates are necessary because about 20 percent of payday loans default.
He said Orr's proposal runs counter to Republican stances for small government and less regulation.
"That's just the opposite of what he's doing," Wood said.
Wood said Alabama should hold off on any new regulations until the proposed federal regulations are settled.
As those proposals are now, Wood said 80-90 percent of payday and title loan companies in Alabama would go out of business.
As for the state legislation, Alabama Arise's Stetson said the coalition would still push for the 36 percent cap, but said Orr's bill would be progress.
"Almost anything is better than 456 percent, so it would be a step in the right direction," Stetson said.
The law places a $500 limit on the loans a borrower can have at any one time. But the state has not had a centralized database to track outstanding loans.
In 2013, payday lenders sued to block the Alabama Banking Department from setting up a database. The lenders lost in circuit court but have appealed to the Alabama Supreme Court, which has not ruled.
Banking Department Superintendent John Harrison said the state has a vendor in place that has done some preliminary work. Harrison said the database could be ready to operate as early as June 1 if there is a favorable court ruling.
"The main thing we want to do is to be prepared to get it in place as soon as possible because it's long overdue," Harrison said.
Many other states allow triple-digit interest rates on payday loans or have no limit, according to a study by researchers at Auburn University's Harbert College of Business.
Ten states, including Georgia, Arkansas and North Carolina, ban payday loans, they found.
Connecticut caps rates at 30 percent, and Montana, New Hampshire and Oregon cap rates at 36 percent.
Category: Payday loans