Circuit court ruling a defeat for payday loans and the days of 456 percent interest.
Photo by David Garrett.
Critics of payday loans say that, even though Alabama state law limits individual borrowers to having $500 in loans at one time, many people who use the high-interest loans owe several payday loan businesses simultaneously.
That all could be changing in early 2015, thanks to a Montgomery County Circuit Court ruling. On Aug. 6, Judge Truman M. Hobbs dismissed a suit filed by payday loan companies against the Alabama State Department of Banking, which was preparing to require lenders to use a common database to track borrowers’ debts to payday lenders.
Elizabeth Bressler, general counsel for the Department of Banking, said the state now is making plans to begin the database by about Jan. 1. Unless the Alabama Supreme Court issues a stay on Hobbs’ ruling, the department will select a company to set up and operate the database, she said.
A court document filed by the Department of Banking says the state had allowed payday lenders to utilize different databases since the legislature legalized payday loans in 2003. But, the document says, the different databases used by lenders do not communicate, which means a borrower can get separate loans from businesses using different databases.
In 2013, the Department of Banking issued a new regulation that required payday lenders to use a common third-party database. Several lenders, including Cash Mart Inc. and Rapid Cash of Alabama, filed suit against the state. Hobbs’ ruling dismissed the lenders’ case.
Payday loans are short-term, no credit check loans that are accessible to people who have jobs and checking accounts. Typically, borrowers promise to repay the loans on their next payday and are charged 17.5 percent interest for that period, which generally is two weeks to 30 days. Borrowers give lenders checks dated for their payday.
Thus, a $300 loan carries $52.50 in interest. A $500 loan costs $587.50 to repay. That equals up to 456 percent interest per year.
Many payday lenders require borrowers to return on payday with cash to cover the loan and interest. They are given their checks back at that point. If the borrower does not come, the lender cashes the check. Some lenders simply cash the checks on the borrowers’ payday instead of asking borrowers to pay in cash.
In his ruling, Hobbs wrote that the lenders argued that the Department of Banking regulation would conflict with the state law requiring use of a database because it would eliminate lenders’ ability to choose a database vendor and negotiate a more favorable fee. If a state-approved database is used, lenders will pay a standard fee.
“The statute does not guarantee a
choice of vendors for lenders. … The only requirement in the statute is that the vendor must be a private sector entity, an obligation honored by the regulation. There is no conflict between the statute and the regulation,” the ruling said.
Hobbs also ruled against the lenders’ claim that the fee charged by the database vendor would amount to a tax. “It would be a strange tax indeed which found its way to private, as opposed to public coffers,” he wrote.
Supporters of efforts to control payday loans are happy with the ruling. “This ruling is the first win for Alabama consumers since payday loans crept into Alabama and were legalized in 2003. A common database ensures that the state Banking Department can adequately monitor payday lenders and enforce the law,” said Shay M. Farley, legal director of the Alabama Appleseed Center for Law and Justice.
“Holding these lenders accountable is only the first step,” she said in a statement. “We need the legislature to act to put an end to their abusive practices. It is time to take a stand against the debt trap. Information gathered from other states’ payday lending databases and independent research shows the extensive amount of household assets that are syphoned by this industry. The legislature must end triple-digit interest rates and require lenders to examine a borrower’s ability to repay before knowingly saddling them with insurmountable debt.”
The Alabama Appleseed Center is one of several organizations that have banded together to drum up grassroots support and lobby legislators to make changes that would include limiting the amount of interest payday lenders charge. A bill introduced by State Rep. Patricia Todd (D-Birmingham) in the 2014 legislative session would have limited the interest rate to 36 percent. That bill died without coming to a vote, but Todd has said she plans to try again in 2015.
“I’ve been working with several people in the department and we are soon going to issue a request for proposals,” said Anne Gunter, associate counsel for the Department of Banking.
Bressler said the Department of Banking will give bidders a month to submit their bids after the request for proposals is issued. She expects to have bids by October.
Asked how long the process will take, Gunter said, “It really depends on the bids we receive. The more bids we receive, the longer it’s going to take. … We’re just going to see what happens.”
Bressler said the payday lenders have filed a notice of appeal with the Supreme Court but the state can move ahead if the higher court does not grant a stay.
“Obviously, we are pleased with the circuit court ruling and we will wait to hear from the Supreme Court,” Gunter said.
Category: Payday loans