Nebraska’s payday lenders have all shut down in the two years since voters capped the interest rate they could charge.
The last handful gave up their delayed deposit services business licenses in December, according to records kept by the Nebraska Department of Banking and Finance.
Just six months earlier, there had been 19 such businesses. That, in turn, was down from the 65 businesses licensed on June 30, 2020, not long before Nebraskans passed a ballot measure limiting the businesses to charging 36% annual interest. The measure passed with more than 80% support.
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Former State Sen. Al Davis of Hyannis, a leader with Nebraskans for Responsible Lending, which pushed the ballot measure, offered only mock sympathy about the industry’s disappearance from Nebraska.
“Isn’t that a shame!” he said, adding: “They portrayed themselves as Good Samaritans helping people out, but they were anything but.”
Davis said he had not anticipated all of the payday lenders would close, although he did expect that the numbers of such businesses would drop significantly. He noted that industry officials had predicted before the 2020 vote that some lenders would likely hang on.
On the other side, Ed D’Alessio, executive director of INFiN, a national trade association representing delayed deposit businesses, said the closures were predictable, based on the experience of other states that have imposed similar rate caps.
“Nebraska’s 36% rate cap on delayed deposit loans was never about consumer protection,” he said. “It was about activists’ thinly veiled desire to eliminate a regulated service valued by many.”
D’Alessio predicted that “Nebraska stands likely to learn the hard way that illegal lenders flourish under restrictive, arbitrary, and antiquated rate caps, with little in the way of consumer protections.”
Payday loans, also known as cash advances, check advances or delayed deposit loans, are a type of short-term, high-cost borrowing that people use to get small amounts of immediate cash.
The lenders typically charge a 15% fee, rather than traditional interest, for a short time period. For example, a customer could write a $100 check dated two weeks into the future, and the lender would give that person $85 cash. When translated into an annual interest rate, the results can be startling.
A state report showed that payday borrowers in Nebraska ended up paying an average of 405% annual rate in 2019. The 1994 state law authorizing payday lenders in Nebraska exempted them from the general 16% cap on interest rates.
As a result, borrowers can end up in a spiral of debt, in which they pay hundreds or thousands of dollars in fees over time and fall further and further behind financially. Some lose bank accounts or even end up in bankruptcy.
Reports from the state banking department showed that about 50,000 people took out payday loans in Nebraska in 2019. The average loan was for $362 and the average person got 10 loans over the course of the year.
The coalition that petitioned to put the rate cap on the ballot and pushed for its passage included several organizations that work with or advocate for low-income Nebraska families, children and older people — the groups most likely to be affected by payday loan debt.
In response, industry representatives argued that the cap would drive most, if not all, payday lenders out of business and leave customers without good alternatives when they need money.
Kent Rogert, a lobbyist for the payday lenders, said the 36% cap meant those lenders could only make about $1.38 per $100 loaned, not enough to survive in a business that sees up to 40% of loans go into default.
“The amount of money you’d make is less than what it would cost to process those transactions,” he said. “You can’t pay the light bill for that.”
Rogert noted that some former delayed deposit businesses may still be open to provide other services, such as cashing paychecks for a fee. He said he doesn’t know what former customers are doing now if they need quick cash.
But a 2017 report from the Center for Responsible Lending said research in other states found that people turned to less costly means of getting money when the payday lending industry shuts down. Those include borrowing from family and friends, getting advances on credit cards, cutting back on expenses and dipping into savings.
Patricia Herstein, general counsel for the Nebraska banking department, cited some other options. She said some people may be using installment loan companies, which are allowed to charge up to 24% interest on the first $1,000 and 21% after that.
Others may have crossed state lines to find payday lenders in Iowa or other states. Some have turned to online lenders, which typically charge very high rates and are not regulated by the state. Herstein said the state agency has fielded some complaints about the online entities and reached out to them with mixed success.
She and James Goddard, program senior director for Nebraska Appleseed, another group that backed the ballot measure, said more credit unions in Nebraska have been offering small-dollar loans.
So far, Goddard said, Nebraskans needing money seem to be finding ways. He said Appleseed has not heard from people in the community saying they are struggling to find alternatives, not like they heard from people who were struggling after taking out payday loans.
“It’s a harmful product that trapped people in a cycle of debt,” he said.
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