Topeka The payday lending industry scored a temporary victory in Kansas Wednesday when a special legislative committee decided not to make an up or down recommendation about a bill that would put tight limits on the interest rates and fees those lenders can charge.
Instead, the panel said its members want to hear more information from the Office of the State Bank Commissioner about the impact that new federal regulations that were just announced last week will have in Kansas.
"I have to tell you that when we began setting this interim (committee meeting) up a month ago, I did not anticipate the CFPB ruling coming out last week," said Sen. Jeff Longbine, R-Emporia, chairman of the panel.
He was referring to the Consumer Finance Protection Bureau, a relatively new federal agency set up in the wake of the financial industry collapse in 2008, which finalized new rules on Thursday, Oct. 5, putting national constraints on the industry.
But Alex Horowitz, who directs consumer finance research for the Pew Charitable Trust, said those federal rules only require the industry to make sure borrowers have the ability to repay the loans, but they do nothing to rein in the exorbitant interest rates and fees those lenders charge, which add up to an average 391 percent per year in Kansas.
He also said they apply only to short-term loans of 45 days or less, or longer-term loans that have balloon payments at the end.
"And so in Kansas, you’re likely to see the market shift almost entirely to loans lasting more than 45 days," Horowitz said. "So 300-plus percent (annual percentage rate) payday lines of credit, or flex-loan products, and auto title installment loans already exist, and they’re likely to become dominant in the market in Kansas after the rule takes effect."
Short-term, high-interest loans have become a booming business in Kansas. According to figures from the state bank commissioner, payday loans, which are typically for two or four weeks at a time, totaled more than $300 million in 2016.
That was actually down from 2012 when payday loans totaled just over $400 million. But as payday lending has subsided, other types of high-rate loans have been on the rise, including longer-term installment loans.
Deputy Bank Commissioner Jennifer Cook told the panel that there has also been an increase, both in Kansas and around the nation, in unlicensed and unregulated lending by firms that operate exclusively on the internet.
In Kansas, companies that make payday and auto title loans are regulated by the Uniform Commercial Credit Code, or UCCC. Currently, payday loans are limited to $500 on loans that typically last seven to 30 days, and lenders cannot charge more than 15 percent of the amount borrowed. However, they can charge an additional 3 percent per month for loans that go past their maturity date.
In addition, lenders cannot make more than two loans to the same person at any one time, and they cannot make more than three loans to the same person within a 30-day period.
The law also prohibits borrowers from taking out a new loan to pay off an old loan.
But Claudette Humphrey, who operates a program for Kansas Catholic Charities that helps people get out from under payday loan debt, said those limits do not provide enough protection for consumers, and she described the kind of people who fall into what she called "the debt trap of predatory lending."
"I have Patricia. She's 75 years old. She makes $1,140 a month on her retirement. She had five loans when she came into my office," Humphrey said. "Once we looked at her budget, we rearranged some things, we did some things. I was actually able to approve her for a loan. That loan was right around $1,750."
The program that Humphrey runs works with banks and private donors to help people pay off payday loans by qualifying them for longer-term, lower-interest loans with monthly payments the borrower can afford.
Ken Williams, president and CEO of Catholic Charities of Northeast Kansas, operates a similar program. However, he said 45 percent of the people who come to his agency seeking help do not qualify because they still could not afford the payments, even at a lower 6 percent interest rate stretched out over a longer period of time.
"So naturally it begs the question for us, as these people come through our door, what process did they go through to have their loan application approved at 350-plus percent, and for payback periods of 15 to 30 days," Williams said. "Perhaps the loan assessment they went through really didn’t care about whether or not their budget, their family budget, could absorb this new expense item."
The special committee was appointed to study a bill that was introduced in the 2017 session that would cap interest rates on commercial loans in Kansas to 36 percent per year, and allow lenders to charge additional fees of up to $20 a month, or 5 percent of the loan amount, whichever is less.
The bill was modeled after a Colorado law that was enacted in 2010. But officials from the payday lending industry said that would effectively put many lenders out of business.
"House Bill 2267 before you today would at the very least restrict Kansans’ ability to access short-term credit, and at worst would effectively eliminate short-term credit and an entire industry in the state," she said.
Advance America operates in 28 states and it has 46 storefronts in Kansas, Townsend said.
It is also a prolific contributor to political campaigns in Kansas.
During the 2016 election cycle alone, according to campaign finance data, Advance America made more than $17,000 in contributions to legislative campaigns, including three members of the special committee: Longbine, and Republican Reps. Jene Vickrey, of Louisburg, and James Kelly, of Independence.
Longbine said after the testimony that he was not comfortable making changes to the credit code that weren't supported by the bank commissioner. Cook said her office had several concerns about the bill, although the office was officially neutral on the bill.
But Sen. Lynn Rogers, D-Wichita, and Rep. Randy Powell, R-Olathe, both said they were not comfortable doing nothing, and they urged the panel to recommend that the bank commissioner report back early in the 2018 session about what changes the state needs to make to the UCCC to comply with the new federal rules.