Wednesday, January 30, 2008
Shurtleff defends payday loan rates
By Lee Davidson
Deseret Morning News
Published: January 30, 2008
Utah Attorney General Mark Shurtleff said Tuesday that banning "payday loans" could hurt the poor more than it would help them and could force more of them into bankruptcies or repossessions.
But debating against that was University of Utah law professor Christopher Peterson, an expert on predatory lending. He said payday loans are essentially legalized loan sharking that can bury the unwary into deep debt. He said societies for millennia have banned the sort of high interest rates that payday lenders now charge.
The pair faced off in the annual Jefferson B. Fordham Debate at the University of Utah's Quinney College of Law, a series that looks at key current issues. They took different sides of whether states should ban any loan with interest rates over 36 percent — which both agree would put the payday loan industry out of business.
Payday loans are usually given for two weeks to those with poor credit. A Deseret Morning News study in 2005 found the median annual interest on them here was 521 percent, or $20 for a two-week $100 loan. Critics contend the needy often cannot pay them off on time and must take out more loans at the high rates to cover them.
Shurtleff said while that interest may sound high, payday lenders actually spend $14 to $15 per $100 loan to service them, including collection on the risky loans. But Peterson said, "The average interest rate on a New York City Mafia loan syndicate loan was 250 percent (in the 1960s), half the price of a payday loan in Salt Lake City."
Shurtleff said, "I've done a lot of research in this area. And I truly believe in my heart of hearts that the people's good is best served by competition" and allowing payday loans as an option besides such things as bouncing checks or pawning goods.
He added, "It would be immoral to take away from somebody an option ... that allowed them to avoid bankruptcy, repossessions and welfare. That would be immoral: not to give people that opportunity and let them make that choice."
Shurtleff said when he took office, he talked to advocacy groups for the poor who complained about debt pitfalls from payday loans. He said he looked into them and found that the state regulators received few complaints from users.
He said a recent study by staff of the Federal Reserve Bank of New York also concluded that after Georgia and North Carolina banned such loans, former users migrated to costlier alternatives, including bouncing checks (and paying expensive bank fees to cover them), or filing for bankruptcy.
Peterson, who has written books examining predatory lending practices, said that study was flawed and did not control for many variables that could have increased bankruptcies and bounced checks. He said payday loans do hurt the poor.
He said studies have shown that a typical payday loan user spends $793 to pay off a $325 loan by needing to take out more payday loans to pay off the original — at astronomic rates — because they cannot pay it off in the original two weeks.
Compared to the 521 percent median rate on them in Utah, he said most cultures have capped interest at no more than 36 percent. He said, for example, ancient Babylon had interest rate caps of 20 percent on borrowing silver and 33 percent on borrowing grain at a time before money was developed. "Before we figured out what money is, we figured out that we need a 20 percent interest cap."
Peterson said the Roman Empire had a 12 percent cap. The ancient Chinese had a 36 percent cap. The American colonies had caps between 5 and 12 percent. Between 1900 and the late 1970s, most states had usury caps between 18 and 42 percent.
But since then, the median cap among states is 400 percent, and many states, including Utah, have no caps — which led to the rise of payday loans. Nationally, Peterson said, more payday lenders exist now than McDonalds, Burger King, J.C. Penneys and Target stores combined.
"The past 15 years have been a dangerous and radical historical anomaly," Peterson said. "If a 520 percent loan isn't usury, what is?"