Alabama Legislation Seeks to Cap Payday Lending

Fist Alabama state flag
Two legislative bills seek to set interest rate caps on payday and titles loans in Alabama: House Bill 320, which seeks to limit payday loans, and House Bill 462, which seeks to limit title loans.

Both bills would place a 36 percent cap on short-term payday loans and title loans distributed by state businesses. Interest rates can currently reach up to 456 percent for payday loans and 300 percent for titles loans.

The proposed bills would also limit the number of payday loans a borrower could take out each year to six. In addition, borrowers that owed more than $500 would be legally barred from borrowing from lenders within the state.

The payday loan bill, HR320, is sponsored by Representative Patricia Todd (D-Birmingham) and Senator Marc Keahey (D-Grove Hill). The title loan bill, HB462, is sponsored by Representative Roderick Scott (D-Fairfield) and Representative Mike Ball (R-Madison).

But the bills go further than trying to merely cap interest rates. Todd and Keahey’s bill for payday loans would also require a central database to allow lenders to check on a borrower’s loan status. Scott and Ball’s legislation for titles loans would force the lending companies to return the money from the sale of a repossessed vehicle, minus principal, interest and fees, to the original title holder.

Currently, payday loans in Alabama are licensed under the 2003 law called the Deferred Presentment Services Act which allows loans to reach $500 and 17.5 percent fees, but that can turn into APRs of 456 percent. Title loans in the states are currently regulated by the Alabama Pawn Shop Act which allows for monthly charges of 25 percent on vehicles and other property.

Opposition and Economical Fears

According to a 2011 report by the Alabama Banking Department, there were 1,070 licensed payday loan businesses in the state. Reducing the interest rate on payday loans to 36 percent would make the high-interest and high-risk loans uneconomical for payday lending businesses. Some speculate that the legislation would force those businesses to close or move to other out-of-state locations.

While opponents of the bill say that it would drive business out of the state of Alabama, Todd believes it will only benefit the state economy. She said payday lenders are making a lot of money “off the backs of poor people.”

Todd said during her work for an HIV organization, she faced tenants having issues with paying for rent due to owed debts on payday loans.

“You can never get out of the cycle of debt,” she said.

As a part of the Alabama House of Representatives, Todd is trying to develop other avenues for consumers to access short-term loans, but on fair terms.

“We regulate other financial industries like banks. There’s not strong enough regulation to regulate these industries,” she said. ‘We are asking that they charge a reasonable interest rate.”

But Todd is unsure of the outcome of this legislation. She said payday lenders have hired lobbying groups which could negatively sway the outcome of the bill.

“It’s usually the person with the most money who wins, but hopefully people will do the right thing and vote to regulate this industry,” she said.