Thank
you, Chair Prozanski and members of the committee, for the opportunity
to testify here today on the topic of payday loans. 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.
Payday
loans are short term, high interest rate loans marketed to consumers
desperate for quick cash, who borrow against their next paycheck. If
the borrower cannot repay the loan when due, the lender typically
encourages him to pay a high fee to “roll over” the loan for another
short term.
Recent
OSPIRG surveys in Portland and in Lane County found that payday loan
outfits commonly charge consumers a staggering 521% annual interest
rate. The studies found that a typical payday loan works in the
following way:
To
borrow $300, a consumer must write a personal check for $360,
post-dated for about two weeks ahead. If the consumer is unable to
repay the entire loan on the due date, he may “roll over” the loan to
extend it for another two weeks, for another fee of $60. The loan may
be rolled over three times, each for a fee of $60 that does not pay
down the principal, and does not result in any additional cash for the
borrower.
If
the borrower rolls over the loan the three times allowed in Oregon,
this borrower -- initially desperate for $300 -- pays $240 in fees and
owes $300 in loan principal. To keep up with the mounting fees and
inescapable debt, a consumer may even take out additional payday loans
to pay off the first.
In
addition to charging outrageous rates, payday loans are very difficult
for borrowers to repay. Borrowers are typically required to pay back
the loan in a single payment – not installments – and to do so after an
extremely short loan term of days or weeks.
Despite
the difficulty borrowers have in paying back the initial loan on the
due date, payday lenders do not typically require a credit check to
determine a consumer’s ability to repay the loan. Instead, the lender
is able to rely on direct access to the borrower account, and can put
through the consumer’s post-dated check repeatedly to recover the loan
amount.
Given the problems with payday loans, momentum is
building for meaningful reform in Oregon. We recommend consumer
protections include strong limits on interest and fees, reducing the
number of rollovers, and extending the loan term to at least 31 days.
In addition, Oregon should give consumers other protections such as the
right to cancel the loan within 24 hours, require lenders to design the
loans to include paying down the principal with each loan renewal, and
make sure consumers are allowed to make installment payments.
Oregon
should to enact the strongest possible consumer protections. The
proposed ballot measure offers the minimum protections necessary for
consumers. On behalf of OSPIRG, I encourage the Legislature not to
accept anything less, and to consider enacting stronger reforms.
