A D.C. Council committee yesterday approved a bill that would drastically reduce the interest payday lenders can charge borrowers.
The full council is scheduled to vote on the measure Tuesday.
Payday lenders are financial firms that give out loans due to be repaid in the next pay period, which is normally two weeks. The interest typically exceeds normal bank rates, and their typical customers are people who need cash quickly.
Often they require only that borrowers prove they are employed, and have bank accounts and Social Security numbers rather than having good credit ratings.
“These payday lenders prey upon low-income neighborhoods,” said council member Mary M. Cheh, Ward 3 Democrat and chairman of the Public Services and Consumer Affairs Committee.
Mrs. Cheh co-sponsored the legislation with council member Marion Barry, Ward 8 Democrat. The bill would limit interest rates to no more than 24 percent per year, or the equivalent of about 92 cents for a $100 loan due for repayment in two weeks.
There is no current limit on their interest rates.
Residents who borrow from payday lenders undertake an average annualized interest rate of 340 percent, according to Mrs. Cheh.
She cited a study from the nonprofit Center for Responsible Lending that found District residents paid $3.3 million in payday loan fees in 2005.
Payday lending services concede they charge high interest rates on loans, but “their argument is they’re only for two weeks,” Mrs. Cheh said. “Their business model is to get people who can’t pay after two weeks. Then they have to borrow again. They cannot get out of the cycle of debt.”
About 22,000 payday lenders operate nationally, according to the Center for Responsible Lending, a research and policy organization. Some are part of national chain businesses, such as Advance America, Check-N-Go and Check Into Cash.
“Only 1 percent of the loans go to borrowers who can afford to pay them the first time without coming back,” said Carol Hammerstein, Center for Responsible Lending spokeswoman.
Mr. Barry was the only member of the five-member committee to vote against sending the bill to a vote by the full council. He said it requires an economic impact statement before the vote.
“It’s too important of an issue to rush it through,” Mr. Barry said. He recommended that other approaches to high interest rates by payday lenders be studied.
The committee markup yesterday was preceded by a June 21 hearing in which a representative from the Community Financial Services Association of America, which represents payday lenders, testified that a 24 percent cap on interest would drive many payday lenders out of business.
The lenders also said their loans help borrowers in emergencies when they could not otherwise qualify for loans.
“No one’s going to stay in business making 92 cents on a $100 loan,” Steve Schlein, spokesman for the Community Financial Services Association of America, said after the vote. “It’s essentially a ban on the industry.”
He also said borrowers unable to get bank loans would suffer.
“They’re going to be bouncing checks, they’re going to miss payments on utilities and they’re not going to have money for emergencies.”