Legislator wants to limit interest rate on high-cost payday loans

Alaskans who need cash quickly can go to a payday lender for a short-term loan of up to $500, handing over a check or access to their bank account to cover the entire loan repayment just as soon as they get paid at work or their pension arrives.

But it will cost them plenty for that fast cash, as much as 15% interest on the debt every two weeks.

A freshman Republican legislator from Anchorage wants to put an end to what he calls “these predatory loans.” Payday lenders “take advantage of the dire situations of individuals,” said Rep. Stanley Wright.

“A lot of folks fall into this trap” as they struggle to pay rent and utilities, buy food or get their vehicle repaired — all necessities in life — the lawmaker said.

State law allows up to two renewals of a payday loan, with the 15% interest charge added on at each renewal.

“In Alaska, the average payday loan is $440, with a 421% annual percentage interest rate,” according to the Alaska Public Interest Research Group. “The high cost of these short-term loans leaves many families trapped in a cycle of chronic debt and poverty.”

Wright’s legislation, House Bill 145, would limit payday lenders to the same maximum annual interest charge of 36% allowed under state law for most other small loans in Alaska.

An average of 15,000 Alaskans a year take out a payday loan, almost one in 50 residents. On average, each borrower takes out more than five such loans a year, according to AKPIRG, an almost 50-year-old nonprofit committed to protecting consumers.

An estimated 12 million Americans a year take out a payday loan, according to a report from the federal Consumer Financial Protection Bureau.

Federal law limits the annual interest rate to 36% on loans to active-duty military and their families and bans the use of preauthorized draws against a military member’s paycheck to cover a loan.

As of January, 18 states and the District of Columbia have enacted an annual interest rate cap of 36% or less on payday loans, according to the Center for Responsible Lending, a nationwide nonprofit.

The problem of high-interest, small-dollar cash loans is particularly acute around military bases, said Wright, a U.S. Navy combat veteran 2009-2015. His House district borders the largest military installation in Alaska, Joint Base Elmendorf-Richardson.

“If you go to any base, you have pawn shops, liquor stores and payday lenders,” he said in an interview last week.

The House Labor and Commerce Committee has held two hearings on the bill, with more work and possible amendments expected this week or next. The schedule presents a likely insurmountable hurdle for the legislation to make it through several committees in the House and Senate and reach the floor for a vote before the adjournment deadline of May 17.

The bill would remain in play for possible action in 2023 in the second half of the two-year legislative session.

Alan Budahl, executive director of Lutheran Social Services of Alaska, spoke in support of the bill at last Friday’s hearing before the House Labor and Commerce Committee, calling it “a pressing issue” for vulnerable members of the community.

The social services agency receives a lot of calls from people trying to cope with the high-interest loans, Budahl said, noting that the costly borrowing disproportionately hurts low-income Alaskans who may lack other options for borrowing to pay their bills.

Limiting the interest rate is not a good solution, Noel Lowe, an owner of Alaska Fast Cash, told committee members. Lenders need to charge a high rate to protect their businesses from the high-risk loans, he said, noting that more than 25% of payday borrowers default on their loan.

Imposing a lower rate under state law would constrain lending and “take this product away from people in Alaska who need it,” said Lowe, who told the committee that his operation is one of the largest payday lenders in the state.

The problem of any predatory lending is not coming from local pawn shops and payday lenders, but rather online lenders based out of state or even outside the country, he added.

“We need to carefully consider the testimony from Mr. Lowe,” North Pole Republican Rep. Mike Prax said toward the end of the committee hearing.

 

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