I love free enterprise, but I believe there is a special place in hell for business people who exploit the poor and vulnerable and politicians who enable them.
A good example is the payday lending industry.
A diverse coalition of Kentuckians, including conservative and liberal religious leaders, plan to gather Tuesday at the state Capitol to urge lawmakers to pass bipartisan legislation limiting the interest and fees on short-term payday loans to an annualized rate of 36 percent.
That is still high compared to normal borrowing costs. But it would be a big improvement over the 400 percent or more that payday lenders can now charge customers.
These two-week loans of $500 or less are designed to help working people cover expenses until their next paycheck. But studies show three-fourths of these loans are renewed or turned into new loans, sometimes trapping borrowers in an endless cycle of debt.
Payday lending emerged as an industry in the 1990s. With about 20,000 storefronts, plus online sites, payday lenders made $40.3 billion in loans and collected $7.4 billion in revenues in 2010, according to the Consumer Federation of America.
Kentucky is one of 32 states that allow triple-digit interest rates on payday loans. The state’s 781 payday lending stores in 2010 made $995.7 million in loans averaging $350 each, according to the Center for Responsible Lending.
Payday lenders collect at least $121 million a year in interest and fees from some of Kentucky’s poorest people, according to the Kentucky Coalition for Responsible Lending. Most profits go out of state — or farther. Advance America, one of Kentucky’s largest payday lenders, is owned by Mexico’s Grupo Elektra.
The Defense Department has limited the interest that can be charged to military personnel at 36 percent, as the Kentucky legislation seeks to do for everyone. Kentucky has put a few restrictions on payday lenders in recent years, but meaningful reform has always been blocked by legislators with lame excuses.
This year’s bill is sponsored by Sen. Alice Forgy Kerr, a Lexington Republican, and co-sponsored by three Senate Democrats, Reginald Thomas of Lexington, Gerald Neal of Louisville and Dennis Parrett of Elizabethtown. Gov. Steve Beshear has supported the interest rate cap since 2009.
Tuesday’s rally is organized by the Kentucky Coalition for Responsible Lending, an impressive list of 89 organizations, including 33 faith groups. Members include statewide associations of Roman Catholics, Baptists, Jews, Presbyterians, Methodists, Episcopalians and Disciples of Christ.
Many of these faith groups disagree on other issues. But the Bible’s Old and New Testaments are clear about the sin of “usury” — charging excessive (or, according to some verses, any) interest on loans to people in need.
With this level of religious support, you would think the bill would be a cinch. But there is a higher power at work: the almighty dollar. Payday lenders spent more than $151,000 last year lobbying legislators and gave them tens of thousands of dollars in campaign contributions.
Legislators who have blocked this bill over the years have had many excuses: there is a demand for payday loans; people with bad credit have few alternatives; it’s free enterprise.
But the truth is there are alternatives, and poor people in the 18 states with double-digit interest caps have found them. Some credit unions, banks and community organizations have small loan programs for low-income people.
There could be more alternatives, too, if Congress would consider ideas such as allowing the Post Office to offer basic financial services, as is done in other countries, or giving poor people an advance on their earned income tax credit.
A bigger-picture solution, of course, would be to raise the minimum wage and rethink trickle-down economic policies that have decimated the middle class and widened the wealth gap to historic levels. But don’t hold your breath for that.
An additional excuse for legislative inaction this year is that Kentucky should wait to see what Congress and federal regulators do. The Consumer Finance Protection Bureau has begun a belated crackdown on payday lending practices.
But only Congress can cap rates at the federal level, and there is little chance of that from the business-friendly Republican majority. Rep. Andy Barr, a Lexington Republican, has been a shameless ally of payday lenders and other financial services companies, which contributed more than $700,000 to his re-election campaign.
I wish the consumer protection advocates and religious leaders good luck Tuesday, but they will need to make many more trips to Frankfort. I just hope they follow the money and keep a good list of which politicians are helping payday lenders prey on Kentucky’s poor and vulnerable — a list they will share widely at election time.