Payday lenders may soon feel the same kind of financial squeeze that sends customers to their doors.
Last Thursday, District Judge C.B. McNeil, of Polson, stymied a last-ditch effort by the payday loan industry to remove an initiative from the November ballot that would cap the annual interest rate on payday and car title loans at 36 percent. Opponents of the measure, McNeil ruled, failed to prove signatures had been improperly gathered, as they had alleged.
In the wake of the ruling, payday lenders find themselves with only a couple weeks to convince voters that the approval of the first-ever citizen initiative on the issue, known as I-164, would wrongfully undermine the industry and its customers.
"What's going to happen if it passes is that the consumer loses that credit option," says Bernie Harrington, owner of EZ Money Check Cashing in Missoula and its five other locations around the state. "Their cost of credit goes up because the alternatives are not very good—like increased fees for bounced checks...It's not a pretty picture for the consumer."
Nor for Harrington. He points out that the proposed regulation would reduce the $15 he currently charges on a two-week, $100 loan to $1.38. More than that, he says, it would hamstring a statewide industry of 106 licensees that loaned more than $38 million in 2009, according to the Montana Division of Banking & Financial Institutions. The businesses brought in about $7.5 million in revenue.
"You can't do that," Harrington says.
Well, voters can, and proponents of I-164 hope they will.
"The fact of the matter is, we're not banning payday lending or car title lending," says Matt Leow, field director for 400% Is Too High—Cap The Rate, the committee leading the effort to pass the initiative. "We're putting in place a quite reasonable cap of 36 percent APR [annual percentage rate]. Now, if you can't stay in business charging 36 percent APR, I'd suggest there's something wrong with your business model."
Montana law allows deferred deposit (payday) lenders and title lenders to charge fees equaling one-fourth of the loan, which, as an annual interest rate, could range from 300 to 650 percent. I-164 would drastically lower that rate.
The initiative marks the first time proponents of an interest rate cap have put the issue on the ballot. But it's not the first time payday lenders have found themselves on the defensive. In 2008, voters in Ohio and Arizona decided, respectively, whether to cap interest rates at 28 percent, and whether to allow payday lenders to continue operating past 2010, when a special interest rate exemption in Arizona was due to expire. If the two states offer any lessons, one is that lenders will fight hard between now and Nov. 2 to ensure the Montana measure fails.
In Ohio, according to data compiled by the Helena-based National Institute on Money in State Politics, payday lenders donated nearly $21 million to defeat the measure, outraising proponents 38–1. In Arizona, lenders donated nearly $15 million, outraising opponents 15–1.
But the spending wasn't enough. Voters in both states overwhelmingly approved the consumer protections.
"So far, I would argue, it's consumers two, payday lenders zip," says Uriah King, vice president of state policy for the Center for Responsible Lending.
The most recent financial statements in the campaign on I-164 show a much more level playing field. As of Sept. 5, supporters of the initiative had raised about $309,000 in cash and in-kind donations, while opponents had raised about $305,000.
Harrington's EZ Money Check Cashing, based in Billings, had contributed $152,000 in cash and in-kind donations to the Coalition for Consumer Choice, the group leading the anti-I-164 effort.
New financial statements are due out Oct. 18.
Despite payday lenders' spending, King believes the approval of I-164 probably wouldn't put them out of business as they claim.
"A 36 percent rate cap bans a defective product, it doesn't ban small loans," he says. "It bans defective products, it doesn't ban a business. Most payday lenders are also check cashers and pawn shops and do bill pay and wire transfers and everything else."
In any case, Harrington believes any regulation of his businesses should be left to the market to figure out.
"I couldn't be in business for 21 years if I was doing what they say I'm doing," Harrington says. "The market would have driven me out of business by now. And frankly, we'd have run out of customers. If we were just trapping these people in this cycle of debt we'd have run out of customers years ago."
If the initiative passes Harrington will have no payday loan customers at all—because EZ Money will not longer offer the product. He says it'd cost more to make the loan than the revenue it would generate.
"No business will do that," he says.
But there are alternatives. The Missoula Federal Credit Union, for one, has begun advertising its "Payday Alternative Loan" with an interest rate of 18 percent.