News : Easy Cash Advance Payday Loan

Hard times for Alabama's low-income residents; Easy terms for short-term lenders

Alabama payday lenders can charge an astonishing 456 percent in interest. Any rational observer would wonder, how is that legal? History tells the story.

In the early 1900s, the state was rife with loan sharking. Scurrilous characters preyed on vulnerable Alabamians with scant access to the credit market. Poor whites and disenfranchised blacks were especially vulnerable.

That started to change when John Patterson took office, first as attorney general in the early 1950s, then as governor in 1958. Patterson started cleaning up the problem and worked to open legitimate credit to the working poor.

With Patterson championing it, the Small Loan Act was passed in 1959. Limiting small loans to a few hundred dollars, the legislation aimed to (a.) encourage lending to low-income earners and (b.) prevent exploitation. As the law took hold, it eventually sparked competition among legitimate lenders and in time worked to further strangle the remaining loan sharking operations.

But with a series of alterations in the 1970s, 1990s and this decade, the rules governing small loans drifted away from Patterson's twofold goals of opening credit to the poor and protecting them from crippling indebtedness.

Payday lenders, going by the fancy names of "deferred presentment" or "deferred deposit services," found a loophole that allowed them to operate outside of the Small Loan law, which caps annual interest rates at 36 percent.

The last vestige of Patterson's dream was vanquished in 2003, when the state Legislature introduced regulations for payday lending under the Deferred Presentment Act. The Legislature exempted payday lenders from the traditional usury laws, allowing for interest rates equivalent to 456 percent annually. The law also prohibited lenders from loaning more than $500 at a time to one borrower, but neglected to set up a central database to track loans. Without such a database, a borrower can go to numerous stores, taking out cash advances.

Tom Keith, an attorney with Legal Services in Huntsville, draws a picture of the problem with a client of his who wishes to remain unnamed.

She owns a modest home and is on Social Security disability income of $792 per month. "She made a single payday loan some two years ago," Keith wrote via e-mail. "Every month since, she was paying only the interest and renewing that loan, in part by taking out more and more payday loans, with more and more post-dated checks.

"She now has eight different payday loans alone, with a total of approximately $2,200 principal outstanding, plus as much as 456.25 percent interest on each. Although she seems to have repaid the principal of several of them many times over by now, she still owes the entire balance originally borrowed on each."

This, Keith argues, shows how the $500 limit on total liability for such loans is ineffective, and illustrates that the limits on renewals of loans are ignored or bypassed.

Source : http://www.annistonstar.com