“I just need some extra cash,” says George Cole, a Paul Bunyan-esque man with a bushy red mustache and a frank but gentle demeanor who has just taken out his fourth high-interest loan from the Kalispell branch of Tennessee-based Check Into Cash, a payday loan company.
In order to get a payday loan, borrowers like Cole write a check for the loan amount, plus a borrowing fee, and post-date it to their next payday. In addition to payday loans, Montanans can also take out small, high-interest, short-term loans from title loan companies, which require the borrowers’ vehicle as collateral.
Cole says he’s been a little short on cash because his paycheck from Plum Creek Timber Co. is being garnished due to an outstanding medical bill. When he arrived in Kalispell in the spring of 1997 his wife was pregnant, he says, nodding to a woman waiting for him in a nearby Jeep Cherokee.
“We lost the baby,” he says. But they still owe a lot of money to North Valley Hospital.
In addition to his $300 loan from Check Into Cash, Cole says he owes $300 more to another payday loan company.
Some in Montana, including Attorney General Mike McGrath and Democratic Rep. John Parker, say such lenders target the poor, and that the interest rates payday and title lenders charge—equivalent to an annual percentage rate (APR) of more than 500 percent in Cole’s case—are unconscionable, and should be limited to 36 percent APR.
According to McGrath, 140 payday and title companies operate in the state.
Check Into Cash charges a $22 fee for every $100 loaned. If a customer renewed the $100 loan and paid the $22 fee every two weeks for a year, the annual percentage rate (APR) would be 573.57 percent. Credit cards, in contrast, are limited by both state and federal law to charging a maximum of 36 percent APR.
When Cole pays $66 for a $300 loan, and he borrows that $300 four times in a row, he ends up paying $284 for the loan.
Check Into Cash’s APR is actually low for payday loan companies, which, according to the Montana Attorney General’s office, charge an average of 650 percent APR. Title loans average 300 percent APR.
Title and payday loans have been banned in 19 states, and in September a federal law capped the APR payday lenders can charge to active U.S. military personnel at 36 percent.
Parker, with support from the attorney general, has sponsored a bill—HB 29—that would cap the maximum annual interest rate for both title and payday lenders at 36 percent, allow borrowers to take out only one payday loan at a time, and disallow payday lenders from extending loans past 14 days.
But former Democratic Sen. Jeff Mangan, who sponsored a successful 1999 bill that created the first restrictions on payday lenders in Montana, and who spoke against Parker’s bill at a recent committee hearing in Helena, thinks the changes are unnecessary, and perhaps harmful.
“I thought we came up with a fairly strict law in 1999,” he says.
Mangan says he’s not connected to the industry, and he isn’t registered with the state as a lobbyist, but he spoke against Parker’s bill because he believes it would jeopardize the jobs of approximately 700 Montanas working for payday/title lenders.
Mangan’s law limited the amount payday lenders could loan, eliminated some of the fees the companies charged, and made it illegal for lenders to extend loans past 14 days.
Mangan believes those provisions of his law effectively protect consumers from getting sucked further into debt, while allowing payday and title lenders to remain in business.
But according to Parker, there’s a loophole that allows lenders to, in effect, extend loans past 14 days. Borrowers like Cole often return to loan companies, pay off their previous loan, and immediately take out another, paying the lending fee once again. The cycle continues, Parker says, and the borrowers get sucked into a “debt trap.”
McGrath says lenders encourage such behavior. In Great Falls, he says, one lender broadcasts a radio commercial offering half off on fees for a borrower’s sixth loan.
Payday lenders are not required to report statistics on repeat payday loan customers now, but under Parker’s law, they would be. Parker’s bill would also mandate a seven-day cooling-off period between loans.
Ultimately, the most contentious provision in Parker’s bill is the 36 percent APR cap. Mangan echoes the concerns of the title and payday loan industries, which say the cap would essentially put them out of business.
While 36 percent may work for credit card companies and banks, Mangan says, title and payday lenders couldn’t survive on the profits a 36-percent rate would return on the small, short term loans they offer.
Furthermore, he says, title and payday loan interest rates may “look ridiculous” extrapolated into APR, but in short-term reality they amount to small change.
“They’re not the cause of anyone’s bankruptcy,” Mangan says.
Putting title and payday lenders out of business would be a shame, Mangan says, because such companies provide emergency short-term loans that can help people through tough financial times.
Borrower Cole agrees: “If they close these places down, I’d be hurting.”
But both Parker and McGrath think the negative impacts of the proposed 36-percent cap are exaggerated.
“I think that 36 percent is a fair rate of return,” McGrath says.
And they believe the negative impacts of the loans on borrowers are real. The high interest rates, according to McGrath, contribute to the debt trap in which many impoverished Montanans find themselves. In 2005, the most recent year for which numbers are available, Montana title loan companies repossessed 858 cars.
So far, Republicans controlling the House Business and Labor Committee have sided with Mangan and the title/payday loan industry.
The Great Falls Tribune quoted Rep. Scott Mendenhall, chairman of the committee, as saying, “This is absolutely an anti-business bill.”
On Jan. 17, the committee tabled the bill.
According to Parker, “they’ve bought into the argument that businesses would shut down.”
But Parker says he isn’t giving up yet, and plans to reintroduce the bill in the coming days.
“There are a substantial number of people in my district who live in poverty,” says Parker, who represents part of Great Falls. If passed he says, his bill will “help people dig out of debt.”