Payday lending reform and the preferential option for the poor
April 18, 2019
The state Legislature took an important step toward meaningful payday lending reform by advancing LB194. While the introduced legislation was initially unable to advance from the Banking, Commerce and Insurance Committee, a recent amendment provided an agreeable foundation for compromise that unanimously advanced the bill from committee and through the first round of legislative debate.
LB194 is common sense policy that provides a preferential option for the poor. The Judeo-Christian tradition emphasizes special care and concern for the poor and vulnerable. The Old Testament often describes God as accompanying the poor of Israel and calling for justice to the poor (see Ex 22:20-26, Prov 31:8-9). The New Testament often recounts the God-Man, Jesus Christ, providing spiritual and material support and consolation to the poor. Jesus gives an incredibly serious charge, with salvific implications, to all his disciples to care for the poor and vulnerable in Matthew 25.
Notably, the “Compendium of the Social Doctrine of the Church” recognizes that our solidarity with the poor must be “appropriately accompanied” by the principle of subsidiarity, which recognizes the respective responsibilities of differing levels of society (for example, family; associations; and local, state, and national government) (no. 449).
PAYDAY LENDING BASICS
Payday loans function as short-term small cash advances. Payday loans usually require a postdated check or electronic access to a debit account as collateral. The payday lender provides the cash advance with a certain fee attached. After a period of time, the loan payment is due. If the payment cannot be made, the borrower renews the advance which includes another fee.
For example, consider John Doe. John needs $400 to pay rent, but lacks the funds. He pursues a payday loan for $400. The payday lender loans $400 to John, assesses a $50 fee and requires payment on the loan in two weeks. In two weeks John cannot make the $450 repayment. John extends his payment, which leads to another $50 fee. John goes through this cycle for several months. Eventually, the fees owed exceed the original amount borrowed.
According to the Pew Charitable Trust, 12 million Americans use payday loans every year for routine expenses. Research from the Consumer Financial Protection Bureau suggests that payday loans are intrinsically structured so consumers fail. Repayment of loans, which include loans and short periods of repayment, become burdensome for consumers. The cycle of debt becomes inevitable for many, especially the poor, who may lack the financial literacy to understand the financial burden assumed.
FUNDAMENTALS OF LB194
Sen. Tony Vargas of Omaha introduced and prioritized LB194. As introduced, the legislation would have extended the duration of all payday loans, placed reasonable limits on the percentage of a borrower’s monthly income a lender could take as a payment, and implemented a cap on the total amount of interest and fees a lender could collect on a single loan. The Nebraska Catholic Conference supported the legislation and lauded the consumer information and protection provisions.
Unfortunately, at the committee level, the legislation reached an impasse. Certain members were concerned with overregulating payday lenders and the potential unintended consequences on those who use the payday lending model as a legitimate form of borrowing.
Ultimately, a compromise on LB194 was reached through AM2587. While AM2587 does not address the fundamental issues of the payday lending industry originally contemplated in LB194, the amendment accomplishes three things in particular. First, it closes a loophole that payday lenders in other states have utilized to evade regulatory limits on interest and fees. Second, it implements new reporting requirements that will allow the Department of Banking and Finance to more effectively track lending activity. Third, it will provide the option of a payment plan borrowers can request once per year that would allow a little more time to pay back a loan.
This amendment provides a positive first step toward more comprehensive payday lending reform in Nebraska. We are grateful for Vargas’ persistence over the last two years in finding some solution to the payday lending problem in Nebraska and for the leadership of many state senators – including Sen. Lou Ann Linehan of Elkhorn and Sen. Brett Lindstrom of Omaha – to achieve some reform of payday lending.
Tom Venzor is executive director of the Nebraska Catholic Conference, with headquarters in Lincoln. Contact him at tvenzor@necatholic.