HELENA — For a few bucks, Montanans can take out a “payday” loan for two weeks, to cover an unexpected expense - but the scores of businesses that make these and other short-term loans are being targeted by Initiative 164 as “predatory lenders.”
“These loans are designed to trap customers into debt,” said Matt Leow, field director for 400 Percent is Too High — Cap the Rate, the committee leading the campaign for I-164. “(These lenders) say these are emergency loans. But at the same time, their business model is bringing in people and keeping them as customers.”
I-164, which for now is on the Nov. 2 ballot, caps the annual interest rate these lenders can charge at 36 percent.
Opponents of I-164 have asked state District Judge C.B. McNeil of Polson to remove it from the ballot, saying supporters used deception in gathering signatures to place the measure on the ballot. McNeil may rule this week.
While the 36 percent rate cap may sound reasonable, lenders who offer these loans say it would make it impossible for them to survive — and they believe that’s the intent of I-164.
“What this is, in effect, is a prohibition,” said Bernie Harrington, the owner of EZ Money Check Cashing, a payday lender with offices in Billings, Missoula, Bozeman and Great Falls. “It’s not going to get (borrowers) any cheaper rates. It’s going to put us out of business.”
Harrington has been leading the campaign against I-164, saying the proponents are misleading Montanans about the nature of his business, which is already regulated by the state.
Payday and title lenders offer a service to working people who need a quick loan, which they can’t easily get from traditional sources like a bank or credit union, he said.
“What (I-164 supporters) are saying is Montana voters and Montana consumers can’t manage their own money and finances, so (they’re) going to do it for them,” Harrington said. “If our industry was (abusing customers) like the proponents of I-164 say we’re doing, I’d have been out of business a long time ago. I wouldn’t have any customers anymore.”
Payday loans and title loans have been around for years in Montana and are regulated under laws enacted about 10 years ago, at the behest of the industry.
Under state law, payday or “deferred deposit” loans can be no more than $300 and no longer than a month, although most are for a two-week period. The lender can charge interest on the loan of up to one-fourth of its amount.
Payday loan customers give the lender a post-dated check for the combined amount of the loan and interest fee, with the understanding it will be cashed in two weeks. They get cash for the loan amount, and then theoretically can cover the check when their next payday arrives.
State law says the loans can’t be refinanced or “rolled over,” because a borrower must pay off the loan before getting another one.
With title loans, the borrower puts up the title of his or her vehicle as collateral and gets a 30-day loan, as much as the value of the vehicle. The lender can repossess the vehicle if the loan isn’t repaid.
State law limits the monthly “fee” or interest to one-fourth of any title loan of $2,000 or less, 18 percent on any loan from $2,001 to $4,000, and 10 percent on any loan over $4,000. These loans can be renewed each month.
About 150 outlets are licensed as payday or title lenders in Montana. According to state reports, payday lenders approved about 150,000 loans last year, totaling $38.6 million. Title lenders made about 12,700 loans, totaling $7 million.
Leow and other I-164 supporters note that the fee of one-fourth of a loan’s amount for two weeks is the equivalent of 650 percent annual interest, and that the same cut on a monthlong loan comes out to 300 percent annual interest.
Montanans know these rates are a rip-off and that’s why they support I-164, which would cap those rates at 36 percent, he said — the same rate cap that exists in some states that have stricter regulations and that Congress recently approved for military personnel.
“We cap all kinds of rates in this country,” he said.
I-164 supporters have tried for several years to get the Legislature to pass an interest-rate cap on short-term lenders, but the bills, opposed by the industry, have never made it out of committee.
Harrington said the 300 percent and 650 percent figures are misleading, because no one who uses payday and title loans holds them for an entire year, many customers don’t take out multiple loans in a year, and many lenders don’t charge the maximum fee of one-fourth of the loan.
For example, he said his business charges a $35 fee for a two-week, $300 loan. If that loan prevents a customer from bouncing several checks and incurring overdraft fees at the bank, then they’ve saved money, he said.
Harrington said if the interest rate is capped at 36 percent, the most he could charge for a two-week, $300 loan would be about $4, and that he can’t run his business on that low of a margin.
I-164 supporters say other lenders, like credit unions, offer better products and can fill the void, but Harrington said if that’s the case, Montanans would already be flocking to those lenders, instead of payday outlets.
Still, supporters of I-164 keep coming back to their basic premise: That payday and title lenders seek to draw customers in for one loan after another, charging them fees that equal very high interest rates.
“The majority of their business is people who take out five or more loans again,” Leow said. “The (borrowers) are back in the hole again, so they take out another one, and another one. … They target people in a desperate situation.”