The Alabama Senate on 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 loan repayment period from 30 days to six months and regulate the interest a lender can charge.
“It keeps the industry going,” Orr said after the Alabama Senate approved the bill 28-1. “It makes for a product that a lot of people rely on. But that diminishes the punitive nature of our current system. “
Payday loans are short-term loans, currently with a term of between 14 and 30 days. State law limits the total amount of payday loans that an individual can take out to $ 500. Lenders can charge up to 456% APR on loans. Orr and supporters of the legislation say the bill would reduce the maximum interest rate to around 120% APR.
Industry critics say loans trap individuals in debt cycles and often force them to take out additional loans to repay past payments. A payday loan database, established by the State Banking Department after the industry’s unsuccessful efforts to block it, found the Alabamians were taking an average of $ 14 million in payday loans per week. Orr said earlier this year that lenders made 1 million payday loans in the first 10 weeks after the database was created, with just 20 percent of users being first-time borrowers.
“The database has proven what we’ve been saying for a long time, that it creates a cycle of debt,” said Shay Farley, general counsel for Alabama Appleseed, who has long fought for wage regulation. “People cannot afford to pay lump sum payments. “
Payday lenders claim they are providing a service to communities that traditional lenders do not serve and have said that strict interest limits will force them into bankruptcy and force borrowers to go to websites, where they can. pay more.
“There are approximately 400,000 Alabamians who use this service,” said Max Wood, owner of a payday loan store and president of Borrow Smart Alabama, an industry group. “They have two choices. They can go to local storefronts or the Internet. “
Orr’s Bill follows similar legislation passed in Colorado in 2010. A study by Pew Charitable Trusts found that about half of the state’s payday lenders shut down after passage. of the law, although those who survived did more business. Fees paid by borrowers fell from $ 95.1 million in 2010 to $ 54.8 million in 2013, while defaults fell 23%.
“It reduces the number of bad checks,” Orr said. “The repayment rate is increasing.
Reform supporters have pushed for a cap of 36% of the APR on loans. But Farley said Orr’s Bill was the best way to achieve their goals.
“We have firm commitments from people who see this as the only real compromise to bring about meaningful reform,” she said. “Otherwise. It will be too user-friendly or too user-friendly for lenders. We believe this is the Goldilocks bill and should be passed this year.”
The bill passes through the House of Representatives.
The law does not cover securities lending, which is governed by the Small Loans Act. Title deed lenders can charge up to 300% APR on these loans.