Thank
you, Chair Prozanski and members of the committee, for the opportunity
to testify here today regarding the problems consumers face regarding
high interest loans check cashing fees. My name is Laura Etherton, and
I’m OSPIRG’s Consumer Advocate. OSPIRG, Oregon State Public Interest
Research Group, is a non-profit, non-partisan public interest
organization.
Last
month, OSPIRG applauded when, during the one-day special session, the
Oregon Legislature passed a bill that will give consumers new
protections from payday loans’ previously unlimited interest rates and
fees. This action sent an important message that gouging consumers with
outrageous interest rates and trapping borrowers in a cycle of debt are
unacceptable practices in Oregon.
Among
its provisions, the bill capped annual interest rates at 36% plus a
one-time loan origination fee of $10 per $100 loaned. The payday loan
industry is one of the largest, and one of the most visible industries
that charge exceedingly high interest rates, with storefronts appearing
on busy street corners and strip malls across the state at an explosive
rate over the last decade.
With
these reasonable limits on payday lending enacted, and due to go into
effect in July of 2007, we have an opportunity to turn our attention to
other areas in the financial marketplace where consumers face
exceedingly high interest rates and fees.
Three
such areas are car title loans, refund anticipation loans, and the
check cashing industry. For each of these, I’d like to outline briefly
what consumers are facing.
The
title loan industry is similar to the payday lending industry in that
the lenders target consumers who may not be eligible for traditional
loans. Title loan companies require the consumer's vehicle title to be
placed as collateral for the small loan. The lender then has the power
to repossess the consumer's vehicle if a payment is missed. A typical
payment agreement for a $400 loan is a minimum monthly payment of $88,
none of which is applied to the principal. This amounts to an
uncompounded APR of 264%. According to the Consumer Federation of
America, the loan can be a maximum of 20% of the vehicle's value, and
lenders often require an extra set of keys to facilitate repossession.
Consumers not only face high interest rates on these loans, if they
miss a payment, they pay the very heavy price of losing their vehicle.
Another
growing area of concern is the refund anticipation loan industry. These
are short-term cash advances against a consumer’s anticipated tax
refund, and they carry annual interest rates from 70% to over 1800%.
The benefit to consumers is minimal, if any, because many consumers can
use e-file and receive their tax refund in 8 to 15 days without taking
out a refund anticipation loan. In 2004, over 56% of refund
anticipation loan borrowers were Earned Income Credit recipients. In
these cases, refund anticipation loans are not only a poor deal for the
consumer, they are also a poor deal for the taxpayer – draining away
approximately $900 million intended to help working families in poverty
in 2004. In 2005, the Legislature took an important first step to, by
requiring lenders to fully disclose the refund anticipation loan terms.
Finally,
consumers are facing very high fees for check cashing. Whether a
consumer is away from home, or simply cannot afford or qualify for a
conventional checking account, he shouldn’t have to pay fees often as
high as 8% just to cash his paycheck. For a monthly paycheck of $2000,
that’s a $160 fee. For that worker, it means he’ll have to do about
five hours of work to earn enough money to cash his paycheck.
OSPIRG
urges the Oregon Legislature to closely examine the problems consumers
are facing with these high interest loans and fees for financial
services, and consider enacting strong protections. Thank you.
