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Payday Lenders Adapting to the New Landscape

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If you’re looking to get a payday loan, these are confusing times. Some states have banned payday lenders altogether because the loans often come with interest rates that top 400%. But in other places payday lenders are flourishing, thanks partly to new federal rules that restrict lending practices by mainstream banks.

One of the most dramatic changes is taking place right now in Montana, where an overwhelming 72% of voters in the November election decided to ban payday lenders from the state. The statewide ballot initiative took effect Jan. 1, and it caps interest rates at 36%.

As a result, many payday lenders are packing up and leaving the state. Of 10 payday loan shops in Missoula, seven are gone already, according to a story by the Missoulian newspaper.

“Nobody’s going to make loans under 36 percent,” Steven Schlein, a spokesman for the Community Financial Services Association, the payday lenders’ trade association, told the Missoulian.

Ohio passed a similar law in 2008, capping interest rates at 28%. But payday lenders have not abandoned the state in large numbers. Arizona’s legislature allowed a law to lapse that allowed lenders to charge high interest rates. Some large payday lenders did leave Arizona thereafter, including Advance America Cash Advance Centers Inc., which closed down all of its 47 locations in the state.

“Advance America made millions in Arizona off of a business model that preyed on vulnerable borrowers and charged them unconscionable interest rates and fees,” Terry Goddard, Arizona’s attorney general at the time, said in a press release. “They could have amended their business practices like other companies and charged lawful rates, but they chose to fold their tent here. That’s just what Arizona voters hoped would happen when they rejected this industry at the polls.”

In other states, meanwhile, payday lenders are doing well. In Florida, the number of payday loan stores has stayed steady since 2007, even as hundreds of bank branches have closed, according to reporting by the Wall Street Journal.

Nationwide, the number of payday loan stores dropped from 23,600 in 2007 to 20,600 in 2009, a 13% decline, the Journal reported. The amount of loans they gave out declined 24%, to $38.5 billion in 2009. Meanwhile, banks actually added locations, growing 1.3% between 2007 and 2009 for a total of 98,000 branches.

The amount of loans dropped off a cliff, however. Banks gave out $433 billion in loans in 2009, a 51% decline from the $887 billion they loaned in 2007.

In addition to their own reluctance to lend in the midst of a recession, banks are now limited by new federal legislation regarding credit card and other types of fees.

Even as voters and legislatures have made payday loans illegal in some states, elsewhere payday lenders have capitalized on banks’ recent financial and regulatory difficulties. “We believe that we’re starting to see a benefit of a general reduction in consumer credit, particularly … subprime credit cards,” Patrick O’Shaughnessy, CFO of Advance America’s, said at a November meeting of investors, as reported by the Journal.

Image: Seth Anderson, via Flickr.com

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