By Rob Schofield
North Carolina lawmakers are debating a proposal to reauthorize the practice of “payday lending” under state law.
The state ended a previous experiment with the practice in 2001, but now lenders have hired a fleet of lobbyists to convince legislators to okay it once more.
With a payday loan, a borrower writes a check, typically for $300, that is post-dated until a date in the future – usually 10 to 14 days later.
In exchange, the borrower receives around $250 in cash.
If done once in a blue moon to solve a temporary emergency and paid off immediately, a payday loan can, theoretically, be of benefit to the borrower.
The problem comes with the fact that the vast majority of borrowers end up on debt treadmill in which they pay $40 to $50 every week or two just to keep a $300 check from bouncing.
The bottom line is huge profits for lenders and huge financial misery for thousands of vulnerable borrowers.
Industry lobbyists argue that if it weren’t for payday lenders, consumers would have nowhere to turn and would just bounce more checks or turn to loan sharks.
Unfortunately, there is absolutely no evidence that consumers bounce fewer checks or patronize fewer loan sharks in states with payday lenders are prevalent.
If anything, multiple payday loans place more pressure on vulnerable consumers – thus encouraging more desperation, more bounced checks and more bankruptcies.
But, says the industry, North Carolina has no choice but to reauthorize the practice because many payday shops are simply skirting our current prohibition by affiliating with an out of state bank.
These lenders “import” bank loans across state lines under the cover of federal law that regulates “interstate” loans.
Unless we provide lenders with a state law they’re willing to operate under, goes the argument, the industry will simply ignore any North Carolina ban.
This ignores the fact that many states have effectively blocked out-of-state banks from operating in their states.
Moreover, federal regulators are clamping down on banks that “rent their charters” to payday lenders.
All “national” banks have already been forced to stop end such activity. All that’s left are a few rogue, state-chartered banks in states with weak regulations.
Payday lenders know that the bank affiliation option is in jeopardy. That’s one of the reasons they’re pushing so hard in North Carolina.
Now is the time for North Carolina lawmakers to put an end once and for all to this abusive practice and to commence serious discussions with mainstream financial institutions about improving access to short term credit for vulnerable consumers.
Rob Schofield is a staff attorney for the North Carolina Justice and Community Development Center.