Backed by a coalition of advocates for the elderly and the poor, a pair of Louisiana lawmakers are proposing to cap payday lending interest rates at 36 percent. That limit would threaten to put the industry, which typically charges annual rates 10 times that high for its short-term high-risk cash advances, out of business in the state.
“The goal is to get Louisianians out of a debt trap,” said Andrew Muhl of the American Association for Retired Persons’ (AARP) Louisiana branch in an interview with the Associated Press. “We see payday lending as a real drain on Louisiana’s economy.” The industry pulls about $3.4 billion per year out of poor communities nationwide through fees and interest charges so high that the typical borrower will end up paying $520 to borrow $375.
Several states are trying to put constraints on payday lenders this year, with mixed results. While reforms are floundering in Idaho and Alabama and Missouri’s are being described as weak and industry friendly, a modest package of reforms in Utah is headed to the governor’s desk.
Most of those bills do not feature an outright interest rate cap like the proposed legislation on the bayou, although 15 states already cap interest rates. A public affairs spokesman for one of Louisiana’s payday lending chains decried the interest rate cap as “a backdoor prohibition” on his business and argued that his customers know what they’re getting into when they take out new loans or roll over old ones in order to have enough cash to keep their phones active and their electricity running.
The argument that payday loans are prevalent because poor folks genuinely need them is not new. Pennsylvania Republicans make the same sort of claims to justify their proposal to invite payday lenders into their state, which is currently one that caps interest rates to effectively ban the industry. Their point about consumer demand is not entirely wrong — low wages, high unemployment, and the spiraling costs of living combine to push desperate people into the arms of companies that promise to solve immediate cash flow problems, and reports indicate that in many cases customers do understand what they’re getting into.
Still, as recent federal enforcement efforts indicate, the industry is unscrupulous about how it does business and adept at undermining and evading regulatory efforts in states that allow them to operate but attempt to protect their customers from manipulation.
But none of that requires lawmakers to allow for-profit businesses to prey upon that very real demand for cash advances. The U.S. Postal Service could provide the same sorts of services at a tenth of the cost, solving poor folks’ cash problems without pushing them into debt spirals or charging them usury rates. That idea has caught on with progressives in Congress, including Sen. Elizabeth Warren (D-MA), and enjoys substantial public support in limited polling. The post office has physical locations all around the country, including in poor communities that have been abandoned by major banks. It has the authority to provide basic financial services to Americans. And it has a manufactured budget crisis in its own accounts that would be resolved by the income generated from replacing predatory private lenders.