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Don't water down payday lending limits

A bill that would have placed reasonable limits on payday lending to protect some of South Carolina's most vulnerable residents is at risk of being significantly weakened by changes suggested by a House subcommittee.

The bill, as passed by the state Senate, would have capped payday loans at $500 or 25 percent of a borrower's gross income during the term of the loan, whichever is less. It also would have prohibited payday lenders from granting a loan to anyone who has had a payday loan in the past seven days. According to a report in The State newspaper, a subcommittee of the House Labor, Commerce and Industry Committee voted to increase the limit to $600 and stripped out any attempt to adjust the limit based on income. The subcommittee is expected to resume its discussion of the bill next week.

Given the potentially vast differences between the two bills, it's not unreasonable to presume this legislation will languish. That would mean the status quo for payday lending in South Carolina, and that is unacceptable.

Payday lenders offer short-term loans, typically for $300 or less. The lenders charge fees that are equal to annual interest rates that in some cases exceed 700 percent. Critics say payday lenders prey on people who are out of options and that payday loans can create a cycle of debt that ends in financial ruin. They also contend that borrowers often extend loans or take out new payday loans to meet the obligations of previous loans.

Payday lenders say there is a demand for their services and that if payday loans no longer are available, some consumers would be driven to even higher-cost alternatives such as overdraft fees on their checking accounts, credit card late fees or unregulated Internet lenders.

There are legitimate concerns about payday lending. As of last year, 37 states had limits on payday lending and some, Georgia and North Carolina among them, have banned the practice altogether. Even the federal government has found the practice troubling, enacting a 36 percent cap on interest rates charged to members of the U.S. military. It's not at all unreasonable for South Carolina to enact its own limits on the practice.

Lenders would accept the $600 cap. Having a hard and fast cap removes ambiguity in determining lending limits, Jamie Fulmer, spokesman for Spartanburg-based Advance America said in an interview.

The industry also would tolerate a "one-loan" database, a state-managed list of borrowers that would be used to ensure customers are not taking out multiple payday loans at a time.

Those ideas are good. But so are the income-based cap and the cooling off period.

Certainly, government interference in private business should be minimal. However, there should be reasonable restrictions on payday lending to ensure this state's most vulnerable citizens don't get trapped in a cycle of debt. Despite the industry's objections, the Senate version of this bill appeared to walk the fine line between eliminating the potential for abuse of payday lending and leaving the service in place for those who need short-term loans and who would use them responsibly.