"Payday Loans: Short-Term Solution Or Long Term Problem?"

Each year, an estimated 12 million Americans take out payday loans. For low- and middle-income individuals and families, these short-term loans for a few hundred dollars can make a difference when emergencies or unexpected expenses arise. However, unscrupulous lenders have entered this $7.4 billion marketplace. Rather than help borrowers through difficult situations, these loans -- with high fees and predatory interest rates of 400 percent or more lead to debt far greater than the original amount borrowed. The ensuing difficulties in repayment can result in threats and harassment.

Recently, the Senate Special Committee on Aging, of which I am Ranking Member, held a hearing on this issue to examine the extent to which a necessary short-term solution for some consumers has become a long-term problem. Repayment of these loans is typically a single "balloon payment" tied to the borrower's next paycheck or other regular source of income, such as a Social Security check, so the impact on seniors can be significant. In fact, 22 percent of payday loans are secured with public assistance or retirement income sources.

I served for five years as Commissioner of the Maine Department of Professional and Financial Regulation, which included overseeing the Maine Bureau of Consumer Credit Protection. Since it was established in 1975, the Bureau has earned a well-deserved reputation in the field of consumer protection, and I was pleased to invite Staff Attorney Eric Wright to testify before our Committee.

Mainers are fortunate to have the laws in place to prevent abusive payday loans and the dedicated staff to enforce them. The State of Maine licenses seven payday lenders - storefront businesses with physical presences here -- that fully comply with state laws imposing strict limits on fees and interest rates. A former superintendent of the Maine Bureau told me that the agency has never fielded a consumer complaint over a payday loan from a state- or federally licensed bank.

Unfortunately, as Mr. Wright explained in his testimony, many Maine consumers have fallen victim to a growing number of Internet-based lenders who are not licensed in our state in order to evade our laws. In 2012 alone, the Maine Bureau handled 86 formal complaints against payday lenders in addition to many more calls from consumers who had questions about these loans. He cited the case of a Maine consumer who initially borrowed $200, and was forced to pay back $1400 on that loan. In another example, a Maine consumer borrowed $300, repaid $360, and was told he still owed another $593.84.

The collection methods of some of these lenders are also cause for concern. Online lenders, or third party collection agencies, are reported to have told borrowers who are late in repayment that they will be arrested or jailed, that their wages will be garnished, or that their privileges to drive will be revoked, none of which could happen under Maine law.

Nationwide, there are about 20,000 storefront lenders. As in Maine, 16 states and the District of Columbia prohibit the most abusive types of payday loans. In addition, federal law caps interest rates on payday loans to military personnel at 36 percent. Research has shown that strong legal protections result in a significant decrease in overall payday loan usage.

The great concern is with internet and, at times, offshore, lenders who are beyond the reach of laws, regulations, and oversight. While online payday loans still make up a minority of the total loan volume, this type of lending is growing rapidly. It is my hope that the Aging Committee's focus on this issue will help alert consumers to the risks associated with payday lending, as well as the dangers associated with borrowing from unscrupulous online lenders who have figured out how to circumvent the laws - here in Maine and in other states - that are designed to protect them.