Originally created 02/28/01

Payday loan reform



How can Georgia consumers, especially those with low incomes or who are poorly educated, be protected from loan sharks who advance cash until payday and then charge handsomely for the service?

Last year state Sen. Don Cheeks, D-Augusta - backed by the big industrial-loan companies - authored a bill that would have permitted class action lawsuits against the loan sharks, arguing that the charges amount to illegal interest. The American Association of Retired Persons and the payday loan industry stopped that bill, worried the small lenders would be forced out of competition. They had their own bill establishing better regulations on the enterprise - controls that would also keep big chains from setting up shop in Georgia.

This year legislators ought to pick up where they left off with bipartisan legislation by Rep. Robert Reichert, D-Macon. While Cheeks is right to underscore the outrageous ripoffs, Reichert argues that payday loans should be properly regulated - as they are in over 20 states - rather than banned, as Cheeks proposes.

An Atlanta Business Chronicle poll last year found 72 percent of respondents used or knew someone who used a payday loan company. It's obvious there's a consumer demand. That's why Sen. Vincent Fort, D-Atlanta, has gotten into the act with a compromise.

Fort would cap the transaction fees at 14 percent (Reichart proposes 15 percent). Agreements for deferred presentment must also be in writing and signed by the customer. And a maximum of $500 outstanding would be allowed to any one customer.

Charging high fines for paying a loan off early is wrong, so Fort would remove all prepayment penalties. They are simply a windfall for lenders when borrowers refinance to try to escape high rates. Fort also notes the penalties provide an incentive to lenders to encourage borrowers to refinance one high-cost loan with another, but his compromise specifically prohibits such loan flipping.

So when it comes to payday loans - mend the system, don't end it. Now if Fort and Reichert can get around Cheeks, who chairs the Senate Banking Committee, real reform can occur.