Payday Lending
3:35 pm
Wed February 2, 2011

Internet lending worries spur move to end payday loan limits

A state law that went into effect early last year limited the number of payday loans borrowers could get per year to eight. It aims to protect people from falling into an endless spiral of debt.

But a Tacoma legislator, who originally backed the law, says it's driving people into the clutches of far worse lenders, on the Internet. 

State Rep. Steve Kirby, a Democrat who chairs the House Business and Financial Services Committee, says Washington now has some of the toughest regulations in the country on high-interest payday lenders. 

The 2010 law includes the following consumer protections:

  • Requires payday lenders to enter all loans into a database maintained and regulated by the state department of financial institutions.
  • Limits payday loans to 30% of borrower's gross monthly income or $700 dollars, whichever is less.
  • Limits the total number of loans to 8 within a 12-month period.
  • Requires payday lenders to offer no-cost payment plans for borrowers who get in over their head, if they request the plan before their loan is due.

Kirby says most of those restrictions should stay in place.  But he's backing a proposal to remove the limit on the number of loans borrowers can get.

"I have been concerned since we put the 8-loan cap in place that it might move people into an unregulated Internet lending market.  And I have reason to believe now that that's exactly what's happening," Kirby says.

Kirby admits data on Internet lending is hard to come by. But he says since the law took effect, the amount of payday loans doled out in Washington has gone down by two nearly thirds  (from $1.3 billion in 2009 to $434 million in 2010.) 

Kirby also says lending has "skyrocketed" on the internet, which he equates to the "wild west."  He says lenders there allow people to borrow thousands of dollars without proving they'll ever be able to pay it off.

He knows it's a problem because constituents call his office asking for help. They've given an Internet lender access to their bank account and are seeing enormous fees deducted. Kirby says all he can do in that instance is advise them to close their bank accounts. 

There's a hearing on Kirby's bill tomorrow (Thursday) in Olympia. 

Some limit backers are not on board

The statewide Poverty Action Network, a low-income advocacy group that fought for the 2010 law and wanted an all-out ban on payday lending, agrees that internet lending is a problem.  But the group's director, Bev Spears, says removing the cap on payday loans would be a mistake.

"We really agree with Rep. Kirby that the internet is a problem, because it's unregulated,"  she says. "But we feel that that's a different fight. And there's no need to for us to roll back our consumer protections" because of it.  

She says the state should concentrate instead on doing a better job of enforcing the regulations that are in place.

For example, she notes that most payday lenders don't effectively inform borrowers about their rights to payment plans, even though they are supposed to under the law.