By Rob Schofield
Members of the N.C. House of Representatives recently approved a bill to reauthorize the practice of making so-called “payday loans” in the state.
The bill passed despite strong opposition from consumer advocacy groups and Attorney General Roy Cooper.
With a typical payday loan, a borrower writes a check that is post-dated until his or her next payday.
In return, the borrower receives the amount of the check in cash – less a 15 percent fee.
Two weeks later, the loan is repaid when the check is deposited.
While theoretically beneficial to a borrower with a desperate and temporary cash-flow problem, the vast majority of payday loans are taken out by borrowers who are “rolling over” a previous loan they cannot pay off.
In effect, these borrowers are stuck on a debt treadmill in which they pay $45 or more every two weeks just to keep a $300 loan alive.
The effective annual interest rate on such a loan is close to 400 percent.
North Carolina banned payday loans in 2001 after a four-year experiment.
Since then, some payday outfits have developed a scheme to evade the prohibition by “facilitating” loans made by out-of-state banks.
These lenders claim federal law limits North Carolina’s ability to regulate loans made by banks across state lines – even though the real lender remains the payday-loan outfit.
The argument of those who support the current reauthorization bill goes something like this: Unless North Carolina reauthorizes the traditional payday model, lenders will continue to use the bank-affiliation scam and consumers will have even less protection.
According to this argument, payday lenders want a new North Carolina law because they “prefer” state regulation.
The real motivator for the industry’s full-court press in North Carolina is simple: They’re losing the fight at the national level and fear that federal regulators will soon put an end to their bank-affiliation scheme.
They “prefer” state regulation because, if they don’t get it, they’re likely to be out of business or forced to adapt to a new, less predatory, less outrageously profitable model of making small loans.
North Carolina lawmakers should not be fooled by the industry’s deceptive argument.
The best way to protect North Carolina consumers from the payday-loan debt treadmill is to say “no” once and for all to this predatory practice.
Rob Schofield is a staff attorney for the N.C. Justice and Community Development Center in Raleigh.