Payday loans: House passes ‘a balance for borrowers and lenders’

Kirby calls measure ‘an evenhanded compromise for the small-loan industry’

March 10, 2009

OLYMPIA – Plucking a rose right out of some often-thorny legislative bushes, the state House of Representatives just after midnight early this morning (Tuesday, March 10, 2009) passed a long-negotiated payday-lending measure that one of its key backers calls “a balance for borrowers and lenders.”

State Rep. Steve Kirby said House Bill 1709 “has been carefully assembled from parts of several bills we’ve discussed” in the House Financial Institutions and Insurance Committee that the Tacoma Democrat chairs.

“Our goal in the legislation is to preserve payday loans as an option for people who have no other choice. This bill helps consumers stay out of trouble if they need to use the product, and it makes it easier for them to escape trouble if they inadvertently fall into a cycle of revolving debt.”

Payday loans would be limited to no more than 30 percent of a borrower’s income or $700 – whichever is the lesser of those two figures, according to terms of the legislation, which passed the House 84-10.

“A significant number of problems in this industry occur simply because borrowers bite off more than they can chew,” Kirby said. “This loan-limit provision in the bill will help thousands of consumers avoid slipping into the spiral of revolving debt that can inadvertently happen if they get in over their heads.”

Other terms of the bill direct that when a lender is told by a customer that the customer won’t be able to repay a loan, the lender must tell the customer that the customer has a right to convert the loan to an installment plan. The installment plan would give the customer three months to repay loans of up to $400, and six months to repay loans of more than $400.

A lender would be required to accede to a borrower’s request to enter into an installment plan. Further, customers who are either in an installment plan or in default on a payday loan couldn’t receive a new loan – a prohibition that would run for two years after the loan is made or until the loan or installment plan is paid in full, whichever day comes first.

“This bill represents an evenhanded compromise for the small-loan industry,” said Kirby, whose Financial Institutions & Insurance Committee has spent the last couple years pondering payday-lending issues.

“There are a lot of people who can’t just reach into their pocket and pull out a credit card, or walk into their neighborhood bank or credit union and borrow the money to take care of a short-term need such as an auto repair or a broken appliance or what have you,” Kirby pointed out.

“So for them a payday loan is the only real choice – and it works for them the vast majority of the time. If used properly, a payday loan will cost the borrower 15 percent of the amount borrowed – as long as the borrower isn’t taking out the loan to try to pay off a previous loan. Problems happen today when a borrower’s need lasts longer than his or her short-term loan allows. If the borrower takes out a loan simply to pay off another loan, he or she can actually end up paying as much or more in fees as the original loan.”

Earlier this year, Kirby’s committee heard public testimony on nine payday-loan measures.

“The legislation we passed in the House early this morning uses the best parts of those bills to craft what I believe is one of the best payday laws in the nation.”

Another key component in the measure authorizes implementation of an electronic enforcement system to ensure that borrowers and lenders obey these new restrictions.

The measure now moves to the Senate for more discussion.