OKLAHOMA CITY – A Comanche County legislator wants to yank the reins on exorbitant payday loan interest rates.
House Bill 2864 by Rep. Daniel Pae would impose a restriction on interest rates assessed on payday loans of $2,000 or less.
No loan, contract or nationally recognized credit card would be permitted to charge an annual percentage rate (APR) greater than 10% of the Federal Reserve discount rate, HB 2864 stipulates. The payment terms on any loan, contract or credit card exceeding that cap would be “unenforceable,” the Payday Loan Prohibition Act would decree.
The Federal Reserve discount rate is how much the U.S. central bank charges its member banks to borrow from its discount window to maintain the reserve it requires. The Federal Reserve Board of Governors lowered the rate to 2.75% effective Aug. 1, 2019.
As a general rule, HB 2864 provides that no person “shall directly or indirectly charge, contract for or receive any interest, discount or consideration greater than provided by the Payday Loan Prohibition Act of 2020 upon the loan, use or sale of credit” in an amount or value of $2,000 or less after Nov. 1, 2020. The limitation would not apply to loans “legally made in any other state, common-wealth or district which then has in effect a regulatory small loan law similar in principle to” the proposed Payday Loan Prohibition Act.
An initial violation of HB 2864 would be deemed a misdemeanor that would be punished with a fine of $1,000 to $5,000 and perhaps a county jail sentence of up to 15 days. For a second conviction, the fine would be upped to $5,000 to $10,000. A third-time offender would be fined $10,000 to $25,000 and incarcerated in the county jail for at least five days or as many as 30 days.
“I listened to complaints from my constituents about payday loans and I have proposed a solution,” said Pae, R-Lawton.
To someone who has poor credit and no savings, a pay-day loan often seems to be the solution to a financial emergency: car repairs or routine expenses such as groceries, utility bills or rent. Most households in the U.S. live paycheck-to- paycheck, research has shown, and a 2019 survey by Go Banking Rates found that 69% of Ameri-can households have less than $1,000 in savings.
A payday loan is a short-term unsecured loan for typically no more than a few weeks and is designed for people who need cash in a hurry.
Consequently, payday loans “have become the face of predatory lending in the United States,” says InCharge Debt Solutions, because the average interest rate on the average payday loan ranges from 391% to more than 521% – if the loan is paid back in two weeks. Yet the Consumer Financial Protection Bureau says 80% of payday loans don’t get repaid in two weeks.
When the loan is approved, the funds are deposited into a verified bank account. The lender will require the borrower to write a post-dated check in payment of both the loan amount and the interest charged for that loan.
An article that appeared Jan. 7 in Money Under 30 relates that the lender will usually require the borrower's paycheck to be deposited automatically into the verified bank. The post-dated check “will then be set to coincide with the payroll deposit, ensuring that the post-dated check will clear the account.”
Payday lenders usually charge interest of $15 to $20 for every $100 borrowed; that translates into interest fees of $300 to $400 on a $2,000 loan. If the consumer cannot afford to repay the loan by the deadline, he/she can ask the lender to “roll over” the loan; as a result, the interest rate soars and continues to increase every time the debt isn’t repaid.
Pew Charitable Trusts reports that 12 million Americans take out payday loans each year and spend $9 billion on loan fees. Federal lawmakers are working to slash payday loan rates from 400% to 36%, Money Under 30 reported in its article.
State Rep. Mickey Dollens, D-Oklahoma City, filed a measure similar to Pae’s three years ago.
Dollens’s proposal, the Deferred Deposit Lending Act, would have limited the APR on deferred deposit loans (a/k/a payday loans) to no more than 60%. The bill died in the House Committee on Banking, Financial Services, and Pensions.