South Carolina Statehouse Blog

Being debated in the Banking and Consumer Affairs subcommittee right now, is the issue of payday lending. What the final product of this bill will look like is still not entirely clear. It may still undergo fundamental changes. The legislative term used for this bill is the “Deferred Presentment Act.” In this committee is Representative Nikki Haley, with whom I discussed the issue.

First of all, to iron out the details, we should understand what the issue is all about. Payday lending generally consists of a lender giving relatively small loans of about $300-$600, in advance of a paycheck, usually for emergency expenses like a doctor’s visit, or car repairs. According to current South Carolina laws, no more than 15% of the borrowed amount may be charged by the lender as a fee. There are no late fees or additional interest fees allowed. This means that if someone takes out a loan of $300, the most the lender will ever be able to get in return is $345.

80% of the borrowers are in good standing, meaning they paid back their loans on time without a hitch, so to speak. The other 20% seems to get into a cycle of not being able to pay back the original loan. What typically happens, is the borrower will take a loan, have to pay it back with another loan, and possibly have to pay that one back with another loan. It’s a detrimental cycle, where the borrower is simply taking money from one firm and giving it to another and so on. Hence, the debate is about how to reform this industry.

“Now, the challenge is…how we can help that 20%, but not hurt 80% who are doing what they’re supposed to do,” explains Rep. Haley.

Some delicate actions will be taken to hopefully remedy this situation. First of all, the proposed reform will only allow one loan to be taken out at a time. There will be a database set up that will enable the lender to find out whether the borrower has a loan already or not. In case the borrower runs into trouble, there will be a period of 60 days in which the borrower has to pay back the loan. After these 60 days, the senate version of the bill, bill S 0398, proposes a 7 day “cool-off” period in which the borrower may not take out another loan.

Rep. Haley sees a problem with this aspect of the bill, and explained that this is being debated right now in the House subcommittee. The Banking and Consumer Affairs committee is going through each part of the issue, and will see the finished Senate version next week. She contends that we should not punish the 80% who do things correctly. The question now is certainly about how much government should control the industry. Rep. Haley believes that “our goal is to give them as many choices as possible and educate them, so they make good decisions.”

It should be noted that banks, credit card companies, and virtually no other financial industry has a “cool-off” period like this, so the question is whether this particular industry should be the only one to be regulated in such a way.

Furthermore, when looking at Georgia and North Carolina, we see that payday lending has been banned altogether. Because of that, they have seen increases in returned checks, and in some cases, people come to South Carolina for these small loans. Rep. Haley explained that payday lending clearly has its market. People will always have emergency expenditures, like unexpected doctor’s visits, car repairs, and so on, and no other institution offers these small loans. Banks and credit card companies certainly do not get involved in this market.

In the Senate’s version of the bill, a limit of 25% of the two-week period paycheck may be borrowed. A dispute over this is probably going to motivate some changes in that version. Representative Haley explained that it is hard to put that percentage-limit given a two-week period because some people may be paid by the hour and will therefore make more or less money at different times of the month. The 25% rule seems to be vague, sometimes inaccurate and a potentially unfair constraint.

There seems to be a misconception by some about the payday lending industry. Some people say that they want people to default so they can charge high interest rates and late fees. However, there are no late fees or additional interest rates that they are allowed to charge. Nobody in the industry wants to lend to people who cannot pay them back, so this bill will hopefully help this inbalance. The goal here seems to be to stop the problem of paying off one loan with another loan. But, how do we do this without hurting the large majority who do just fine with the loans? That is certainly up for question at the State House.