Don’t change what’s working

Simply put, there is no reason for the Legislature to give any further consideration to so-called reforms to the state’s short-term lending rules, as passed by the Senate last week. There’s no reason because there’s no benefit to anyone other than the payday loan industry.

Lynnwood Democrat Sen. Marko Liias’ bill, SB 5899, which is now in the House for consideration, would replace the current system’s reforms passed by the Legislature in 2009. Currently, payday loans are limited to $700 at any one time, and a borrower cannot take out more than eight loans in a 12-month period. Fees are limited to 15 percent on amounts $500 or less, with an additional 10 percent on amounts over $500. Loans are short-term, typically paid back after the borrower’s next payday, where the loans get their name. Borrowers are allowed to enter into installment plans of up to six months, with no additional fees or interest if they are unable to repay when the loan is due.

Liias’ bill, which passed the Senate, 30-18, would eliminate payday loans in favor of installment loans of up to 190 days, again with a maximum of $700. But the fees and interest could dramatically add to the costs for borrowers. Lenders could charge an origination fee of 15 percent and annual interest of 36 percent, amortized and accruing daily. On top of that, they could charge a monthly maintenance fee of 7.5 percent, up to $45 per month. Borrowers could potentially save money over the current system, as the interest is amortized, but that assumes they would pay off their debts in a few weeks rather than the typical six-month term.

The payday loans, as now regulated by the state, can be a useful option to people who can’t otherwise turn to traditional bank loans or credit in a situation, such as a car failure or other emergency, when cash is needed quickly. But often those who need these loans are most likely to fall victim to predatory lending.

Prior to the 2009 reforms, borrowers in the state took out more than 3.2 million payday loans. By 2011, the number of loans had dropped to 856,000. And the number of payday loan stores also dropped 42 percent, Propublica noted in a 2013 report. Which explains why Moneytree, an industry leader, sought the legislation. And why its executives made campaign donations to Liias and several others in the House and Senate.

Liias and others backed the change, pointing to a similar system in Colorado as something that provides protection for borrowers. And it’s true that the Pew Charitable Trust, in a study of the payday loan industry, found that after Colorado’s most recent reforms in 2010, the amount of total spending on loan fees by Coloradans dropped to $54.8 million from $95.1 million in 2007.

But Pew and others aren’t making any suggestion that Washington should drop its current system in favor of Colorado’s. In a letter to Washington legislators, Pew said that the state’s 2009 reforms benefitted its residents, keeping many from falling into difficult-to-break cycles of debt. Washington is one of nine states that Pew found had instituted exacting requirements that protected consumers. Fifteen states do not allow storefront payday loan operations, but the payday loan industry is largely unregulated in 27 other states.

Meanwhile, the federal Consumer Financial Protection Bureau is expected to release its own rules for such loans later this year, and it’s not a stretch to think its rules might closely align with the current rules in Washington state.