While COVID-19 forces Alabamians to deal with health concerns, job losses and drastic disruption of everyday life, predatory lenders stand ready to take advantage of their misfortune. Our state policymakers should act to protect borrowers before these harmful loans make the pandemic’s financial devastation even worse.
The volume of high-cost payday loans, which can carry annual percentage rates (APRs) of 456% in Alabama, has decreased temporarily during the COVID-19 pandemic. But that is simply because payday lenders require a person to have a job to get a loan. The national unemployment rate jumped to nearly 15% in April, and it may be higher than 20% now. In a sad twist, job losses are the only thing separating some Alabamians from financial ruin due to payday loans.
Title loans: A different kind of financial poison
As payday loan numbers have dropped, some borrowers probably have shifted to auto title loans instead. But title loans are just a different, and arguably even worse, kind of financial poison.
Like payday lenders, title lenders can charge triple-digit rates – up to 300% APR. But title lenders also use a borrower’s car title as collateral for the loan. If a borrower can’t repay, the lender can keep the vehicle’s whole value, even if it exceeds the amount owed.
The scope of this problem in our state is unknown. Alabama has a statewide payday loan database, but no similar reporting requirements exist for title lenders. That means the public has no way to know how many people are stuck in title loan debt traps.
Title lenders in Alabama don’t require people to be employed to take out a loan with their vehicle as collateral. People who have lost their jobs and feel they lack other options can find themselves paying exorbitant interest rates. And they can lose the transportation they need to perform daily tasks and provide for their families.
Federal and state governments can and should protect borrowers
Long after people who lost their jobs return to work, the financial damage from the pandemic will linger. Bills will pile up, and temporary protections against evictions and mortgage foreclosures likely will disappear. Some struggling Alabamians will turn to high-cost payday or title loans in desperation to pay for rent or utilities. If nothing changes, many of them will end up pulled into financial quicksand, spiraling into deep debt with no bottom.
State and federal governments both can provide protections to prevent this outcome. At the federal level, Congress should include the Veterans and Consumers Fair Credit Act (VCFCA) in its next COVID-19 response. The VCFCA would cap payday loan rates at 36% APR for veterans and all other consumers. This is the same cap now in effect under the Military Lending Act for active-duty military personnel and their families.
At the state level, Alabama needs to increase transparency and give borrowers more time to repay. A good first step would be to require title lenders to operate under the same reporting duties that payday lenders do. Enacting the 30 Days to Pay bill or a similar measure would be another meaningful consumer protection.
The Legislature had an opportunity before the pandemic hit Alabama this year to pass 30 Days to Pay legislation. SB 58, sponsored by Sen. Arthur Orr, R-Decatur, would have guaranteed borrowers 30 days to repay payday loans, up from as few as 10 days under current law. But the Senate Banking and Insurance Committee, chaired by Shay Shelnutt, R-Trussville, voted 8-6 against the bill early in the session.
That narrow vote came after the committee canceled a planned public hearing without advance notice. It also happened on a day when Orr was unavailable to speak on the bill’s behalf.
Alabamians want consumer protections
Despite the Legislature’s inaction, the people of Alabama strongly support reform of these harmful loans. Nearly three in four Alabamians want to extend payday loan terms and limit their rates. More than half support banning payday lending entirely.
The COVID-19 pandemic has laid bare many deficiencies in past state policy decisions. And Alabama’s lack of meaningful consumer protections continues to harm thousands of people every year. The Legislature has the opportunity and the obligation to fix these past mistakes. Our state officials should protect Alabamians, not the profit margins of abusive out-of-state companies.