Adam Hollier, guest writer
Another option. That’s what cash-strapped Michiganders would get from imperfect-but-practical legislation to modernize Michigan’s 15-year-old payday lending law. And the need for such has arguably never been greater, as President Donald Trump and Congress remain at odds over a second relief package to ease the economic fallout of the deadly coronavirus that continues to wreck government and household budgets alike.
Wealthy and working-class families dine from vastly different smorgasbords when facing unexpected financial crises. The former routinely refinance their houses to save money, borrow from their nest eggs and home equity lines-of-credit, or score cheap signature loans from banks and credit unions.
Meanwhile, the latter most assuredly rank among the one-third of American adults who cannot cover an unexpected $400 expense. That’s because working-class folks — like most of my constituents — are less likely to own a life-bettering asset (like a house), harbor significant savings, or have the requisite collateral and credit score to qualify for a low-cost loan from traditional lenders.
House Bills 5097 and 5253 recognize this inequality and endeavor to give needy Michiganders a pragmatic option to address unexpected emergencies. Sponsored by Rep. Brandt Iden (R-Portage) and Rep. Sherry Gay-Dagnogo (D-Detroit), the measures passed the House in May on bipartisan votes of 58-49 and 98-9 and are now in Senate Regulatory Reform Committee.
Specifically, this “small loan” legislation would authorize Deferred Presentment Transaction providers — commonly called payday lenders — to offer high-risk borrowers what market analyses affirm they want: Access to more credit. Longer repayment terms. And heightened state oversight of the industry.
Well-intentioned adversaries of the package mostly decry its 11 percent monthly fee on the principal of these would-be loans. They argue, correctly, that equals an annual percentage rate of 132 percent, which they dub “predatory.”
But the average credit score of subprime-installment-loan customers is 500-575. Thus, the rate sought for these unsecured loans benefits consumer risk. Moreover, patrons considering a payday loan frequently factor such costs — and consequences — of missed bill payments; bounced check fees; utility reconnection fees; and, in extreme cases, bankruptcy.
Still, package opponents insist it will abet the cycle of debt that exists in low-income communities. They often cite a 2018 report by the Center for Responsible Lending that found “70 percent of Michigan borrowers take out a new payday loan on the same day they pay one off.” It’s indeed a brow-raising statistic but one explained by this common-sense observation: Current law affords payday borrowers neither enough money nor time to fully escape a financial hardship.
Nevertheless, to assuage this unsavory trend, the legislation prescribes loans up to $2,500, compared to the current maximum of $600; a longer repayment term, 90-to-365 days, compared to 14-to-31 now; and rigorous state regulation of payday lenders, replete with database tracking of all their small loan transactions.
In keeping with federal recommendations, the legislation also requires lenders to assess borrowers’ ability to repay their loans; permits consumers to cancel such advances within three business days; disallows prepayment penalties for borrowers who retire their debt early; and creates a fund to “promote financial literacy and education” in schools and communities.
Predatory? Hardly. Rather, these are the tools that can hasten financial freedom.
Instead of fixating on what this legislation is not, I and my Senate colleagues would be wise to focus on what it could be: A sensible monetary option for a faction of consumers without many.
Sen. Adam Hollier represents Michigan Senate District 2 which encompasses Detroit, Hamtramck, Harper Woods, Highland Park and the Grosse Pointe communities.
Lansing State Journal – Payday lenders offer an option to the working class