Gov. Robert Bentley today announced the approval of a statewide database of loans made by payday lenders, which offer quick cash but at relatively high interest rates. The goal of the database is to ensure lenders comply with state law and do not allow customers to borrow more than $500 at any one time.
Advocacy groups for the poor say the database will keep residents from incurring more debt than they can handle. However, members of the payday lending industry say the database will simply push consumers to use unregulated online loan businesses and force local lenders to lay off workers.
According to a Wednesday press release from the governor's office, the Alabama Banking Department issued the new regulations. The department will handle the database and is set to have it operational by January.
"These regulations will represent a step forward for both consumers and lenders in Alabama," John Harrison, superintendent of the state banking department, said in the press release. "These regulations offer an opportunity to help Alabama consumers avoid some particular problems related to payday loans."
Payday loan stores offer money based on a person's income. In Alabama, payday lenders are allowed to charge 400 percent annual interest rates on their loans, which equates to about $17.50 per $100 loaned. The lure of such businesses, however, is that they do not require customers to have good credit or bank accounts to receive loans, unlike traditional banks.
Anniston finance department records show there are 25 payday loan businesses in the city.
Kimble Forrister, executive director of Alabama Arise, said his organization was pleased with the plan for a statewide database. Arise is a non-partisan group that advocates for low-income residents.
"This corrects one of the worst loopholes in Alabama's payday loan law," Forrister said. "This is a great step forward."
Forrister said that though state law dictates payday lenders cannot issue loans to customers who already have $500 in existing payday debt, there has been no way to enforce it because there wasn't a statewide database tracking who had loans.
"Finally, the $500 limit will be enforceable," Forrister said. "People won't be able to go from store to store to get $500 from each one."
According to a study released in March by the Insight for Community Economic Development, payday lending establishments cost the U.S. economy $744 million in 2011, resulting in a net loss of more than 14,000 jobs. The study shows that in Alabama, the economy lost approximately $47.7 million in 2011 due to payday loans.
The study states that though payday lending generates some economic activity, those gains are less than the resulting losses, since the high interest rates reduce household spending.
The Insight Center is a California-based national research, consulting and legal organization that focuses on issues facing low-income communities.
Max Wood, president of Borrow Smart Alabama, a volunteer organization of 400 lenders in the state that works to educate consumers about payday businesses, said the database will not stop residents from seeking small loans but instead will hurt small business and could mean the loss of hundreds of jobs. Wood said that while some payday lenders are owned by large corporations, many in the state are locally owned.
"This is a slap in the face to small business," Wood said.
Wood said that in states that have enacted similar databases, the use of payday lending decreased between 50 percent and 70 percent on average.
"The volume in our stores will go down dramatically," Wood said. "That's going to cost jobs."
Wood said the database will not solve the problem of excessive debt, since consumers can just go to other loan sources, such as online lenders, which are unregulated.
"That will just make the situation worse, not better," Wood said.
Forrister said Alabama Arise's next step in regards to the payday lending industry is to focus on interest rates.
"We will be fighting to get that lowered," Forrister said.
Staff writer Patrick McCreless: 256-235-3561. On Twitter @PMcCreless_Star.