Governor Jack Markell signed legislation Wednesday aimed at breaking the cycle of debt thousands find themselves locked into via the predatory practice of short-term "payday" loans.
Payday loans are small-amount loans with a repayment period of less than 60 days. Up to now, there has been no limit to the number of payday loans an individual could take out in a given time. Many of the annual percentage rates commonly run in excess of 400 percent, and many who take out loans are forced to repeatedly take out and roll over loans because they can't pay them off, which often leads to them defaulting.
"We recognize some people need immediate access to an immediate loan. This bill maintains that choice," Governor Markell said. "Instead of a financial hand-up, though, repeated use of these loans can become a set of financial hand-cuffs. This law helps limit those worst-case scenarios."
Under House Bill 289, sponsored by Reps. Helene Keeley and Gerald Hocker and Sens. Anthony DeLuca and Colin Bonini, borrowers would be limited to taking out five payday loans of $1,000 or less in any 12-month period, including loan rollovers or refinancing. The bill also would create a database to track the number of payday loans a person has obtained. The state banking commissioner's office would be required to provide the General Assembly with a report on the prevalence and nature of payday loans.
"Payday loans are a stopgap fix to financial problems, not a long-term solution. People who regularly take out or roll over payday loans are in untenable financial situations and desperately need relief," said Rep. Keeley, D-Wilmington South. "This bill will hopefully help break that cycle and put people back on the right path. There are many other avenues out there for people facing financial problems -- nonprofit groups can provide counseling and assistance, and banks are probably a more viable option for people who need a more long-term solution."
The state Justice of Peace Court system reported that last year, payday lenders filed more than 2,400 cases in Justice of the Peace Courts for payday loan defaults.
"The testimony we heard in the Senate on payday lending was compelling and indicated a strong need that something be done," said Senate President Pro Tempore Sen. DeLuca, D-Newark, the measure's prime Senate sponsor. "Both the limits on the number of loans a person can take out and the data we hope to develop through this law is a good start in dealing with the issue."
Thirteen other states outright prohibit payday loans, while another 21 states prohibit payday loan rollovers. Thirteen states have statewide databases to track payday loans.
Illinois, which enacted a payday loan reform law in 2005, reported a steady drop in the number of unique borrowers through 2008, from a high of nearly 120,000 in 2006 to about 80,000 in 2006. That is an average annual drop of 20.4 percent.
"This legislation still gives people the freedom and flexibility to manage their own finances as they see fit, but it reduces the risk that they may be victimized by predatory lending practices," said House Minority Whip Rep. Hocker, R-Ocean View.
"This law provides needed protections for consumers while still allowing for access to cash for those in need. I am very proud to be a sponsor of this important law," said Sen. Bonini, R-Dover South. "Thank you to all who worked so hard to make this happen."