Testimony in SUPPORT of S-2141 Relating to Payday Lending
Senate Committee on Commerce
April 23, 2024
Alan Krinsky, Director of Research & Fiscal Policy
The Economic Progress Institute supports Senator Quezada’s bill S-2141, which would eliminate the harms of deferred deposit transactions that drive the predatory payday loan industry in Rhode Island. S-2141 would repeal the statutory carve-out which enables payday lenders to play by special rules instead of by the rules applying to other small loan lenders.
Payday loans, such as those permitted in Rhode Island, are high-cost loans structured to perpetuate an ongoing cycle of debt. This debt trap is integral to the success of the payday lending model, with “75% of all payday loan fees… generated from borrowers with more than 10 loans a year.”1 The federal Consumer Financial Protection Bureau (CFPB) has done extensive research on payday lending practices, finding that the average payday loan consumer gets caught in a cycle of debt (see Figure 1), taking out 10 loans per year due to an inability to pay off the balance with the constantly growing fees.2 In brief, as the Center for Responsible Lending (CRL) explains, “payday lenders are actually providing access to debt, not credit.”3
Consumers relying on payday lenders face considerable harm associated with payday loans, including increased difficulty paying bills, delayed medical spending, involuntary bank account closure, higher likelihood of filing for bankruptcy, and decreased job performance. Payday lenders also increase wealth disparities by disproportionately targeting people of color.
In 2018, the Rhode Island Advisory Committee to the U.S. Commission on Civil Rights received testimony and adopted unanimously a report which included the following findings:
- Payday Loans are Targeted at People of Color
- Payday Loans Create a Cycle of Debts
- Payday Loans Adversely Affect the Rhode Island Economy
The Committee recommended that “The General Assembly should pass a bill eliminating the statutory carve-out for payday lenders.”
Figure 2 shows how Advance America, owner of 9 of the 10 payday storefronts in Rhode Island, acknowledges on its website that it charges 260.71% APR on its payday loans.
Annual payday loans in 2021 exceeded $33 million. After the closing of some outlets in 2022, there remain ten outlets in the state, nine of which are Advance America locations. In 2018, payday lenders drained $7.5 million in fees from Rhode Islanders, and in 2022 they drained $3 million.
According to data from RI’s Department of Business Regulation, payday lenders issue tens of thousands of loans each year, totaling close to a billion dollars in loans since 2008 (see Figure 3).
Industry advocates claim that payday lending meets a need that is not otherwise adequately addressed. However, there exist better options. Navigant Credit Union, Bank of America, and the Capital Good Fund (with its mission “to create pathways out of poverty through equitable financial services”) all offer small loans, with low fees and interest rates ranging from 5 to 30 percent.4 These options stand in stark contrast to payday loans and their APRs of up to 260 percent in Rhode Island. Even putting money on a credit card, with an APR of 23.74 percent, compares favorably with payday loans.5
Without strong federal rules, states wanting to protect their residents from payday lending practices need to take legislative action. Nationally, 18 states and the District of Columbia enforce laws with rate caps of 36 percent or lower, protecting close to 100 million consumers from the predatory lending practices of payday lenders. Among the states in the Northeast, only Delaware and Rhode Island still allow full payday lending, with Maine providing some limits on fees (see Figure 4).
The Center for Responsible Lending estimated in 2019 that consumers in New England states that do not permit payday lending save a total of $252.7 million each year. Conversely, in Rhode Island, consumers faced fees of $7.6 million that year due to payday lending, accounting for 93 percent of all payday lending fees in New England.
The very profit model of the payday lending industry is based upon capturing people in a cycle of debt and is illustrated by one graphic obtained by the Consumer Finance Protection Bureau through an enforcement action. This image, from an ACE Cash Express New Hire Training Document, does not show any exit path from the payday lending cycle of debt (see Figure 5). Clearly, new hires are being instructed in how the process is intended to work.
After the U.S. Defense Department determined that predatory lending “undermines the military readiness,” Congress acted in 2006 to protect active-duty military personnel by capping loans to such individuals at 36 percent.
Rhode Island should follow the lead of the Defense Department and Congress and cap loans at 36 percent at most. Payday loans are harmful to consumers and hurt the economy. S-2141 would eliminate payday lending as a separate category, requiring all lenders to follow the same set of rules. This legislation would provide Rhode Islanders with valuable protections from the predatory loan industry, and we urge you to send this bill to the Senate floor.
1 Diane Standaert, Delvin Davis, and Charla Rios, Payday and Car Title Lenders Drain $8 Billion in Fees Every Year, 2019.
(Center for Responsible Lending).
2 Consumer Financial Protection Bureau, Payday loans and deposit advance products: a white paper of initial data
findings, 2013. Cited in Delvin Davis and Susan Lupton, States without Payday and Car-title Lending Save Over $5 Billion
in Fees Annually, 2017. (Center for Responsible Lending). For a Rhode Island example of the cycle of debt, see Derek
Thompson, “When You’re Poor, Money is Expensive,” The Atlantic, July 2014,
https://www.theatlantic.com/bu...: The article begins
with the story of Alex and Melissa, from Scituate, Rhode Island. A sudden medical emergency pushes them to succumb
to the payday lending trap. After seeking an initial loan of just $450, they soon found themselves “trapped in a cycle of
dependency…[facing] more than $1,700 in fees.”
3 Center for Responsible Lending, “Fact v. Fiction: The Truth about Payday Lending Industry Claims,” January 1, 2001,
https://www.responsiblelending....
4 Lisa Rowan, “New Small-Dollar Loans From Bank Of America Offer Alternative To Expensive Payday Loans,” Forbes,
October 14, 2020, https://www.forbes.com/sites/a...
offer-alternative-to-expensive-payday-loans/?sh=2bbba8d92306.
5 The national organization Bank On, with 74 coalition members in 30 states and the District of Columbia, works to
increase the range and number of safe and affordable banking options for low-income borrowers. Bank On’s goal “is to
ensure that everyone has access to a safe and affordable bank or credit union account.” See https://joinbankon.org/.