Mr. AKAKA. Mr. President, I rise today to introduce the Low-Cost Alternatives to Payday Loans Act, which would authorize demonstration project grants to eligible entities to provide low-cost, short-term alternatives to expensive, predatory payday loans. Payday loans are small cash loans repaid by borrowers' postdated checks or borrowers' authorizations to make electronic debits against existing financial accounts. Payday loan amounts are usually in the range of $100 to $500 with payment in full due in two weeks. Finance charges on payday loans are typically in the range of $15 to $30 per $100 borrowed, which translates into triple digit interest rates in the range of 390 percent to 780 percent when expressed as an annual percentage rate (APR). Loan flipping, which is a common practice, is the renewing of loans at maturity by paying additional fees without any principal reduction. Loan flipping often leads to instances where the fees paid for a payday loan well exceed the principal borrowed. This situation often creates a cycle of debt that is hard to break. Currently, there is a lack of low-cost, short-term credit product alternatives available to consumers. My legislation is intended to encourage the development of products that satisfy the current demand for small loans of a short duration, but at a fair interest rate.
The payday loan business has grown rapidly in recent years, with industry revenues ballooning from $810 million in 1998 to $40 billion in 2004. A study by the investment bank, Stephens, Inc., of Little Rock, Arkansas, estimated payday loan volume of $25 to $27 billion to 9 to 14 million U.S. households, generating between $4 and $4.3 billion in fees. According to a 2004 study conducted by the Consumer Federation of America (CFA), there were an estimated 22,000 payday lender storefronts nationally. Through these storefronts, payday lenders originated an estimated $40 billion in loans and received $6 billion in finance charges.
Payday loan providers claim that they are offering a simple financial product that addresses an emergency or temporary credit need that usually cannot be met by traditional financial institutions. An analysis of payday lending statistics by the Center for Responsible Lending indicates that the majority of payday loan borrowers have multiple loans each year. Two of three borrowers have five or more payday loans annually, and half of these borrowers have 12 or more payday loans annually. Only 33 percent of payday borrowers use four or fewer payday loans annually. Some borrowers seek loans from two or more payday lenders, multiplying the potential for getting trapped in debt. Research by the Community Financial Services Association of America, the payday loan industry's national trade association, found that 40 percent of payday loan customers renew their payday loans five times or more. Many of these customers are lower or middle income working families who need a small amount of money for a short period of time. This becomes a financial bridge to help pay for unexpected expenses.
Mr. President, more and more predatory lenders locate near military installations, targeting vulnerable military service members and their families. The Army has gone to the extent of offering payday lenders some competition through its Army Emergency Relief (AER) initiative. AER, a private, nonprofit organization, has been working on a national program called Commanders Referral that will debut at Fort Hood, Texas, later this year. This program will offer soldiers up to two no-interest, $500 loans a year, in an attempt to undercut the aggressive tactics of payday lenders. Testifying before the House Subcommittee on Life Issues on February 16, 2005, the Master Chief Petty Officer of the Navy testified that the payday industry "has made it a practice to prey upon our Sailors." He went on to say "it is not being dramatic to state these payday loans to our troops could be a threat to their military readiness." As the ranking member of the Armed Services Subcommittee on Readiness and Management Support, this is an issue of grave concern to me.
I am heartened to see that some federal credit unions have developed alternatives to payday loan products. The Pentagon Federal Credit Union Foundation (Pentagon Federal) and Langley Federal Credit Union (Langley Federal) have each introduced a payday loan alternative. Pentagon Federal offers the Asset Recovery Kit (ARK). For ARK, borrowers must agree to financial counseling, or already be receiving counseling, in order to receive a loan of up to $500. The borrower pays a $6 flat fee for the loan and no credit report is required, but financial counseling is mandatory. Langley Federal's QuickCash product features the quick turnaround of a payday loan, but at an 18 percent annual percentage rate. It does not have the financial counseling requirement of the Pentagon Federal's ARK, but is still a viable alternative to a high cost payday loan. In my home state, Windward Community Federal Credit Union, located in Kailua, Hawaii, has developed a payday loan alternative. This credit union is offering simple short-term loans, with a short approval period, at a fair interest rate. Mr. President, with the demonstration grants offered through my legislation, it is my hope that more credit unions, community development financial institutions and banks will develop and offer similar types of innovative credit products that can serve as alternatives to payday loans.
Mr. President, the payday loan industry exploits people that are in financial need. There is a demand for this type of loan, but these loans are excessively priced. My bill authorizes the Department of the Treasury to award demonstration project grants to banks, credit unions, and community development financial institutions to develop and implement a credit product subject to the APR promulgated by the National Credit Union Administration's Loan Interest Rates, which is currently capped at an APR of 18 percent. The grants would provide consumers with a lower-cost, short-term alternative to predatory payday loans. The demonstration project grants would require individuals seeking a loan through this program to pursue financial literacy and education opportunities that will help them better prepare to manage their finances.
Mr. President, I have a letter in support of my legislation that is signed by the Consumer Federation of America, the U.S. Public Interest Research Group and the Center for Responsible Lending. I ask unanimous consent that it be included in the RECORD.
Mr. President, I encourage my colleagues to support this legislation so that affordable alternatives to payday loans can be found.
Mr. President, I also ask unanimous consent that the text of the bill be printed in the RECORD. Thank you Mr. President.
