The state Senate banking committee is set Tuesday to hear testimony on two bills quietly introduced Friday that critics say are designed to foil upcoming federal regulations on payday lenders, and could legalize auto title lending in Michigan.
The bills, sponsored only by Sen. David Robertson, a Republican representing Waterford and parts of Oakland and Genesee counties, would allow payday lenders to work through “credit service organizations.” These credit service organizations — or CSOs — ostensibly arrange loans for consumers but usually work directly with only one lender, then add on a service fee, resulting in short-term loans in which the annual interest rate frequently soars above 300 percent. The CSO and lender typically share the same owners, consumer lending experts say.
“This bill is predatory payday and car title lending on steroids,” Debbi Adams, who leads economic justice efforts for the community group Michigan United, said in a statement. “It is designed to extract even more money out of those families that can least afford it. We need to be ending these predatory debt trap practices, not inventing new ones.”
Those experts add that they know of no legitimate services offered by CSOs, other than to skirt state laws that ban abusive and predatory lending. The CSO tactic has already been used in Ohio to thwart a voter-approved ban on payday loans. CSOs were explicitly barred by Michigan regulators in 2006, when large national payday lenders applied to operate using the CSO strategy.
The two bills — SB842 and SB843 — have attracted no co-sponsors. The Senate banking committee chairman, Darwin Booher (R-Evart) has scheduled a hearing that will be limited to testimony only on both bills for Tuesday. A representative for Booher said no other action on the bill was planned and that Booher hasn’t taken a position on the bills.
Robertson, the bill’s sponsor, didn’t return calls from The News on Tuesday.
Michigan law now caps the fees and rates on payday loans, limiting the short-term borrowing to 31 days, allowing borrowers to take only one loan at a time from a single lender and to carry no more than two loans at any one time. The law also bars lenders from rolling over the loans so that borrowers are continually paying new loan fees to extend the life of their earlier loans.
A 2013 study by the Center for Responsible Lending found that payday loans were generating $3.4 billion in fees every year, with $2.6 billion of that total coming from rollover loans. Noting that that 85 percent of payday loans were going to borrowers who take out seven or more loans per year, the center called the long-term, repeat borrowing a “debt-trap.”
Even with a ban on rollovers, Michigan’s law still allows payday lenders to earn triple-digit effective annual interest rates, noted Jessica AcMoody, a senior policy specialist with the Community Economic Development Association of Michigan. The $76 fee the state allows on a $600, 14-day payday loan is the equivalent of an annual interest rate of 332 percent, AcMoody said.
The move to legalize CSOs is happening in several states as payday lenders work to head off new rules that should be released soon by the federal Consumer Finance Protection Board. The final rules aren’t known, but the CFPB has indicated that the rules would require lenders to consider the borrower’s ability to reasonably repay the loan. Michigan and most states that allow payday lending don’t require lenders to consider the borrower’s ability to repay.
The CFPB is also expected to cap interest rates and rollovers on loans. Recent changes in the Military Lending Act backed by the CFPB limited annual interest rates to 36 percent and barred any rollovers.
In Ohio, payday lenders use CSOs to create a chain of loans for indebted borrowers, even though payday lending is banned in the state, said Linda Cook of the Ohio Poverty Law Center. Lenders take out licenses as both a lender and a CSO. Once a loan is made and can’t be repaid, lenders switch to operate as a loan adviser under the CSO license, and arrange a new loan from another lender, while adding a hefty fee.
“They will change hats and start being the arranger of credit and have a different lender loan the borrower money to just pay themselves back with another lender’s money for the big debt trap they created,” Cook said. “Now they collect the fees as a credit service organization.”
It’s unclear whether the proposed changes would allow auto-title loans, where short-term loans are secured by the title to the borrower’s paid-off car or truck, and are illegal in Michigan. CSOs are used to make auto title loans in other states, consumer experts said. A bill to legalize auto title lending in Michigan was introduced in the state Senate at the end of 2014, but died in committee after consumer groups and other lenders opposed it.
AcMoody said that several lobbying groups have been hired by payday lenders already operating in Michigan.
“One of the arguments being used to back this legislation is that the CFPB rules are going to shut down the current products offered in Michigan, and so people aren’t going to have any other options,” she added.
However, studies in states that cap interest rates have shown that borrowers find other, less predatory options in financial emergencies, and that there are community and credit union loan programs that offer a better long-term solution for troubled borrowers.
“We need to talk about coming out with appropriate products, not something that charges triple-digit interest rates,” AcMoody said. “People need more options.”