State Representative Frank Ferri, owner of a Johnston bowling alley, has seen how the short-term, high-interest loans available at neighborhood payday loan shops can leave customers on a debt treadmill.
One of his employees, temporarily strapped for cash, had been enticed by the offer of quick money with no credit check required. He borrowed $350 for two weeks — the usual length of such loans — and agreed to the 10 percent fee.
But repayment left him broke again, and he took out another loan immediately after. Two weeks later, he took out another, and paid another $35 fee. And so it went, on and on, for months. "By the time he told me, he'd borrowed 11 times," recalls Ferri, a Warwick Democrat. "He'd paid them $380 in interest fees, and still owed the $350 he'd borrowed. I ended up helping him out, because otherwise I thought this would never end."
His employee's experience pushed Ferri into action. Late last month, for the second year in a row, he filed a House bill that would limit the interest charged by payday lenders. On the afternoon of February 8, as the Phoenix went to press, a coalition of civil rights activists and community organizers were scheduled to hold a State House press conference kicking off a media and lobbying campaign in support of the bill.
Ferri hopes to see payday lenders' rates capped at 36 percent per year, the same limit that applies to every other lender in the state. Fifty state representatives have signed on as co-sponsors. State Senator Juan Pichardo (D-Providence) has filed an identical bill in the Senate.
That 36 percent is enough to keep Visa and MasterCard in business, but it's just a fraction of what the loan shops currently charge. Ferri points out the 10 percent fee on a two-week loan actually amounts to an annualized interest rate of 260 percent. "I see it as a predatory loan product," he says.
If you're one of the lucky ones who has never received a utility shutoff warning, perhaps you've never noticed the payday loan shops found in poorer communities, or heard about their sky-high rates.
A customer presents the store with a check for the loan amount (no more than $500 in Rhode Island) plus 10 percent. The check is cashed when the due date arrives 14 days later. There's no credit check, and no need for collateral.
At one time, almost every state set maximum interest rates around 36 percent, but those limits began to fade as lobbyists persuaded lawmakers that consumers were somehow eager to take on the burden to get easy credit. Today only 17 states and the District of Columbia impose the limits that apply to banks, credit card companies, and other lenders.
The first shops appeared in Rhode Island in 2001. Today the state is home to 31, with all but a few run by two companies, Advance America of South Carolina and Check 'n Go of Ohio.
Ask Jamie Fulmer, an Advance America spokesman, and he'll tell you the company provides a necessary service. Without the stores, he says, consumers would be stuck paying high credit card late fees and overdraft charges. The rates, he adds, reflect the risk the company takes making loans secured only by personal checks.