By Barbara Buckley
SB201, a significant consumer protection measure to curtail abusive predatory payday and title loan lending, will be heard in Assembly Commerce & Labor Committee today. How does the measure help consumers? To understand the bill and how it affects the existing statutory scheme, let’s walk down memory lane.
In 2005, I sponsored the state’s first comprehensive payday/title loan legislation (well, I started in 2003 but that legislation applied to all loans whose terms were under a year, so the industry changed its entire business model to issue loans lasting a year and a day to avoid all regulation, so I came back the next session a little smarter). The 2005 bill did not cap interest rates. Our state had repealed usury laws during the ‘80s in an effort to attract Citibank to move to Nevada (they since moved away casting doubt on the policy of radically changing state laws to chase business, but I digress). In 2005, it was thought impossible to reinstate usury caps, especially with a Republican Senate and a Republican governor. So the legislative efforts focused primarily on regulating the length and frequency of the loans.
Under the law, a payday loan could be issued for two weeks and not renewed or “rolled” more than six times. So, even though the interest rate was truly outrageous – the average payday loan interest rate in Nevada now is 652 percent – at least the interest on it could not accrue more than five months. So, if a Nevada citizen takes out a payday loan of $200, if he or she renewed it or “rolled” it over the maximum amount of times, the borrower would pay $122 in fees. If there was no limit on the length of the loan, the fees on a loan issued for one year would be $307. Similarly, if a Nevada citizen took out a title loan, the loan amount could not exceed 210 days. Under the law, a customer could not take out more than one payday loan at a time nor take out another loan to pay an existing loan. In essence, while the rate was not regulated, frequency and length of loan were regulated to prevent a “debt treadmill.”
So what has occurred in the intervening years? For some lenders, the ability to reap these incredibly high fees was just not enough. In one recent audit conducted by the state of Nevada, one title loan lender admitted it charged 194 percent in interest (a very low rate compared to others) but extended the loan past the statutory maximum of 210 days to add an additional 240 days to the loan term. So, under this scheme, a customer who took out a loan of $5,800 was forced to pay $4,822 in interest and fees, $1,649 more than she should have paid under the law! Overall, according to the state, this one lender assessed over $8 million in illegal interest to people desperate to hang on to their cars. Think this is a rare case?
This is not an isolated instance. While most lending business models would not want to lend money to someone who cannot afford to pay it back, the payday and title lending industry makes most of its money from a business model where profitability is achieved from loans that greatly exceed the borrower’s ability to repay without re-borrowing. According to The Pew Charitable Trust, the average borrower takes out eight of these loans, not the single emergency loan scenario often described by lenders (and which, of course, is not affected by this bill).
So, how is enforcement working nationally and in the state of Nevada? The Obama Administration, through the creation of the Consumer Financial Protection Bureau, took aim at payday and title lending to assure that a consumer had the ability to repay. Sounds like common sense underwriting, right? Not so fast. The current administration is repealing this regulation along with protections afforded to the military to stop payday lending at exorbitant rates to those serving our country. (In case you are wondering about this, payday lenders target our young enlisted personnel because they have regular paychecks and if they don’t pay, it could affect their security clearance).
Thanks to federal law and our federal courts, consumers cannot sue payday and title loan lenders for violations of the law because they insert an “arbitration clause” in their contracts and ban consumers from coming together to stop wholesale violations of the law. Consumers can try private arbitration, but have a very difficult time seeking relief from the courts. So, the principal entity left to enforce payday and title loan lending is the state of Nevada and its audit ability. The problem with that? They don’t catch wholesale violations of the law until after consumers have been fleeced and millions of illegal fees have been charged. They don’t get involved until after people have lost their homes and cars because of the illegally assessed fees have been assessed. The help also does not arrive for years as the payday and title loan lenders frequently utilize the court system and all their appeals to stretch the resolution (ironic since they block access to courts for their victims).
So, what does SB201 do? It stops the abuse before it happens. It requires lenders use a basic underwriting database to ensure the person is eligible for the loan. This targeted solution is in use in 12 of the 35 states that allow payday lending and prevents payday and title loan lenders from professing ignorance that a borrower had 14 other payday loans pending or from suggesting to customers that they go to another payday lender to pay off their existing loan.
Illegally assessed fees prevent vulnerable community members from being able to adequately support their families. Stopping predatory lending allows members of our community to become more stable, less likely to face eviction and instability. The payday and title lending industry (and its 22 lobbyists) are fighting this measure as it will significantly stop it from receiving revenue not permitted by existing law. But that is a reason to support the measure, not to defeat it. Vulnerable Nevadans deserve no less.
Barbara Buckley, Esq., is Executive Director, Legal Aid Center of Southern Nevada and the former speaker of the Assembly.