A database to track, regulate, and publicize predatory paycheck lending would unfairly and illegally hamper the payday loan business in Alabama, according to a lawsuit filed last week by a group of businesses with names like Cash Mart and Quick Cash. The lenders, whose business model relies upon charging stratospheric interest rates that can effectively trap desperate borrowers in perpetual debt, are seeking to prevent the state from establishing a centralized record of their loans.
The proposed database would streamline a record-keeping system that is so complex and scattered that it actually facilitates lender abuses. State law is supposed to prevent any one borrower from having more than $500 in outstanding payday loans. But Alabama lenders “currently can use multiple databases in their stores,” the Montgomery Advertiser explains, “which means customers can take out multiple loans in different locations, making the debt limit difficult to enforce.”
The database proposal is therefore an attempt to make lenders comply with existing law. Efforts to apply new laws to the industry have failed. The database would be a consolation prize for consumer advocates in the state who saw their push to cap interest rates on payday and title loans rebuffed by lobbyists in the spring.
Payday lending involves charging a high interest rate that compounds on a monthly rather than annual basis. Borrowers often end up paying triple-digit interest rates to access their own money a little early. Interest rates on the loans average 455 percent nationwide. Not surprisingly, the kind of urgent need for cash that would drive a person to enter such a dangerous financial contract is most common in impoverished communities. Past studies have found the payday loan industry siphons more than $3.4 billion out of poor communities each year in fees alone.
The industry spends a lot of that money fighting regulation. Payday lenders are very active political contributors. The industry spends millions of dollars each year lobbying against regulatory efforts like Alabama’s in states around the country.