Policy Matters

Currently, negotiations are underway to craft a bill to reauthorize Mississippi’s payday lending law.  If proposed changes are approved, Mississippi will remain the most expensive state in the Southeast to get a payday loan.  The chart below illustrates how Mississippi’s fees compare to the fees paid by payday loan borrowers in the Southeastern States:

The chart raises the question – why should working Mississippians pay $50 for a payday loan when working families in Tennessee pay $30 for the exact same loan?  Given that the law does not sunset until July of 2012, lawmakers should vote no on HB455 and make meaningful changes in the next legislative session.

On Friday, January 21, the Mississippi Senate enlarged a loophole in the original version of the House payday lending reauthorization legislation. 

Despite efforts to increase consumer protections by implementing a 28 day repayment period on larger payday loans, the current bill’s payday lending provisions allow lenders to get around the 28 day repayment term through a process called loan splitting.  The table below illustrates the proposed changes to payday loan repayment terms:

The “up to” language for smaller loans allows the loophole to exist:

While the fees paid on the two loans would drop slightly, the consumer protection provision of a 28-30 day repayment term is easily circumvented.  While there has been some discussion of a regulatory ruling requiring that multiple loans taken out simultaneously be considered one loan, Mississippi lacks the infrastructure to enforce this ruling at the time the loans are made. 

To enforce this law and to prevent borrowers from taking out multiple loans beyond legal limits, a statewide system, or database, is the single-most effective way to prevent emergency loans from turning into debt traps.  Thirteen states already use a statewide system to enforce responsible lending.

Author: Ed Sivak, Director MEPC

On January 18, the Mississippi House of Representatives voted down several amendments to a bill to reenact the Check Casher’s Act that would protect consumers.  Among the issues voted down included provisions to lower the APR to 36% and extend the repayment term to 90 days.  The House also voted down a provision to implement a statewide system to enforce the law before passing its updated version of the Check Casher’s Act.

Without a statewide system, or database, there is no way to track, in real time, whether or not a borrower has multiple loans or if a lender extends multiple loans.  Thirteen states have implemented statewide systems effectively including the southern states of Alabama, Florida, Kentucky, South Carolina and Virginia.

In Florida, the loading of historical transactions prior to database implementation showed that 16 percent of customers were out of compliance – they had multiple loans outstanding.

In the states that have implemented a database, appropriations have not been needed.  Lenders typically pay a fee of $0.50 – $1.00 per transaction which covers to costs of the system.

As the House bill moves to the Senate, a database represents an important tool to protect consumers, weed out bad actor lenders and enhance the efficiency of the regulatory infrastructure.  In its absence, the limited provisions to extend the repayment terms of payday loans to 30 days will remain unable to be enforced at the time of extending or receiving a loan.

Author: Ed Sivak, Director MEPC
Source: Florida Department of Banking

Once a borrower takes out a payday loan, he or she could quickly find themselves in a situation where they need multiple payday loans to cover expenses.  Table 1 illustrates how a family could find themselves caught in the debt trap.  A family earning $35,000 a year receives approximately $1,344 every two weeks in take home pay.  After taking out a payday loan and repaying it with fees for a total of $365, the family has only $979 left to cover $1,107 in expenses.   

Still short, the family will either need to take out another payday loan or choose to skip paying certain bills.  On average, borrowers take out 8 payday loans per year.  A 36% rate cap in Mississippi with 90 days for repayment would allow working families to avoid the debt trap.

Author: Ed Sivak, Director MEPC