Debt traps

Our view: Lawmakers must end practice of payday lending at astronomic rates

March 08, 2010

For more than a quarter-century, Maryland has capped the interest rates for short-term consumer loans and has kept the storefront payday lenders and their rip-off financing plans at bay. But exploiting a possible loophole in state regulations, lenders have shifted tactics and found a way to charge Maryland consumers the equivalent of 600 percent annual interest rates and higher.

That's a far cry from the existing 24 percent to 33 percent cap in state law. But these unscrupulous companies sidestep the regulations with an accounting trick - a hefty origination fee to broker the maximum-interest-rate loan. The evasion is possible because the charges are made by separate business entities.

The deals are marketed over the Internet and have become a growing $42 billion problem for states across the country. Vulnerable consumers, usually low-income workers looking to borrow $1,000 for a matter of weeks or months, are fleeced at terms so usurious they make Shylock look like an employee of good old Bailey Brothers Building and Loan.

State financial regulators believe these payday loans likely violate existing law, but enforcing the statute would require court action that might take years. Lawmakers can end the practice faster by approving pending legislation to close the loophole and require origination fees to be factored into the interest rate cap.

Lenders are fighting back with the usual yelping pack of well-paid Annapolis lobbyists. They argue that the loans are helping keep families afloat in these difficult economic times and that the high costs are merely a reflection of the market. Default rates for such loans are high.

Sorry, but 600 percent interest rates don't pass the smell test under any circumstance. Loan sharks offer deals like that, too, but it doesn't mean their terms should be officially sanctioned. What's next, legalized leg-breaking by the collections department?

If companies want to argue that Maryland's interest rate cap is too low, then let them offer proof. Those caps have been in place in times of far higher credit costs. If they were viable in the days of double-digit interest rates, why are they inadequate today?

So far, the state agency that regulates consumer credit has received a modest number of complaints - about 40 during the last two years. But the number increased nearly sixfold between 2008 and last year and continues to climb.

Those complaints should raise the legislature's collective blood pressure. Take, for instance, the Anne Arundel County cancer survivor paying 682 percent interest on $578, or the city resident who took out an $875 loan last June on an interest rate of 675.77 percent and still owes most of the principal.

Officials don't know exactly how much money is changing hands under those kinds of terms in Maryland, but this much is clear: Even the poorest, most downtrodden soul should not have to pay that much for a personal loan. Lawmakers need to end this disgraceful practice immediately.

Readers respond
Fight these legal loan sharks every step of the way, but don't be surprised when the needy and vulnerable find a way to fall into their traps again and again.

Sean Tully

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