This is the full written version of shorter testimony offered by KEJC Director Rich Seckel to the Senate Banking and Insurance Committee on March 5.
Thank you, Mr. Chairman. I am Richard Seckel, Director of Kentucky Equal Justice Center, a nonprofit civil legal aid organization.
I’ve been watching payday loan policy for some time, even before payday loans were authorized by statute—back when bankruptcy trustees sued because the effective high interest on payday lending debt crowded out other creditors.
Two elements of HB 495 concern us:
Language that would allow online payday loans
An increase in the database fee from $1 to up to $3
We are concerned that an online option would increase the volume of payday loans. Some portion of new users would find themselves in a debt trap: a cycle of repeat loans. The database fee increase needs justification, but it’s likely the smaller of the two costs.
In case you are not familiar with payday loans. They got the name because the consumer would write a check to the lender for money they didn’t have but expected they would when payday came. The lender would give them money and hold onto the check for a short period of time before they deposited it to get their money back, plus fees. Hence the term “deferred deposit.”
Over time, Kentucky set some guardrails. By statute, we allow up to two loans totaling up to $500 at a time. We permit a fee of $15 per hundred or $75 on that $500. The payday loan database operationalizes those limits. We now charge the consumer $1 to check it up front.
Picture the ad that invites you to “download our app.” It may make the first loan easier than going to the brick and mortar store—which isn’t that hard to find. But what’s really troubling is the image of pressing that button for the next one, and the next. Remember, that’s $15 per $100. But it’s $75 for $500 and that’s just the first time.
On average, you have that $500 for 3 weeks.
Repeat loans are the rule not the exception. Nationally, 75% of fees are generated by people stuck in more than 10 loans a year. In Kentucky in 2023, borrowers entered into an average of exactly that during the year: 10 loans. There were just over a million transactions. The fees totaled $74.6 million dollars. We don’t want to see more people caught in the cycle.
For years now, policy has trended toward greater protection. In 2006, Congress enacted a 36% interest cap for payday loans to military personnel. The military had found the loans were destabilizing to military families. State legislatures in Illinois, New Mexico and Minnesota passed interest rate caps in 2021, 2022, and 2023 respectively.
By the way, our statute requires our database contractor to report . . . data. DFI contracts with a company called Veritech, a division of Catalis, to operate the database and provide reports.
We are less concerned about the fee increase. The information in the reports is useful. However, the reports are not easy to find. They are not posted on the DFI website, nor, I believe, are they regularly provided to legislators. It takes an open records request for a member of the public to get them.
I do want to acknowledge that nationally, even as the proportion of online loans is going up, the number of loans has been trending down—with a spike in some states post-pandemic relief.
I’d like to suggest you hold off on the bill, get the latest Veritech report, and have a chance to ask them questions. You’d get a sense of the impact of the loans, the repeat loan phenomenon and the value of the database. In any case it’s too soon to say “there’s an app for that.”