Alabama Senate approves payday loan reform bill

The Alabama Senate Tuesday approved legislation that could limit the amount of interest charged by payday lenders.

The legislation, sponsored by Sen. Arthur Orr, R-Decatur, would extend the time to pay off the loans from 30 days to six months and regulate the interest a lender can charge.

“It allows the industry to continue,” Orr said after the Alabama Senate approved the bill on a 28-1 vote. “It allows a product that a lot of people rely upon. But it decreases the punitive nature of our current system.”

Payday loans are short-term loans, currently lasting between 14 and 30 days. State law limits the total amount of payday loans an individual can take out to $500. Lenders can charge up to 456 percent APR on the loans.  Orr and supporters of the legislation say the bill would bring the top interest rate down to about 120 percent APR.

Critics of the industry say the loans trap individuals in cycles of debt and often force them to take out additional loans to service payments on earlier ones. A payday loan database, established by the State Banking Department after unsuccessful efforts by the industry to block it, found that Alabamians were taking out an average of $14 million on payday loans a week. Orr said earlier this year that lenders made 1 million payday loans in the first 10 weeks after the establishment of the database, with only 20 percent of the users being first-time borrowers.

“The database proved what we’ve long been saying, that it creates a cycle of debt,” said Shay Farley, legal director of Alabama Appleseed, which has long fought for payday regulation. “People can’t afford to pay off lump sum balloon payments.”

Payday lenders argue that they provide a service to communities traditional lenders do not serve and have said strict caps on interest would drive them out of business and force borrowers to go to Internet sites, where they could pay more.

“There are approximately 400,000 Alabamians who use this service,” said Max Wood, a pay day loan store owner and president of Borrow Smart Alabama, an industry group. “They have two choices. They can go to local storefronts, or they can go to the Internet.”

Orr’s bill follows similar legislation that passed in Colorado in 2010. A study by the Pew Charitable Trusts found that about half the payday lenders in the state closed their doors after the law passed though those that survived did more business. Fees paid by borrowers dropped from $95.1 million in 2010 to $54.8 million in 2013, while defaults fell 23 percent.

“It reduces the number of bad checks,” Orr said. “The repayment rate goes up.”

Advocates of reform have pushed for a 36 percent APR cap on the loans. But Farley said Orr’s bill was the best shot at achieving their goals.

“We have strong commitments from people who see this as the only true compromise to bring meaningful reform,” she said. “Otherwise. it will be too user-friendly, or too lender-friendly. We think this is the Goldilocks bill, and it needs to pass this year.”

The bill moves onto the House of Representatives.

The law does not cover title loans, which the Small Loan Act governs. Title loan lenders can charge up to 300 percent APR on those loans.