Nebraska payday lenders have all closed in the two years since voters capped the interest rate they could charge.
The latest handful waived their delayed depository services business licenses in December, according to records maintained by the Nebraska Department of Banking and Finance.
Just six months earlier, there were 19 such companies. That, in turn, was down from the 65 businesses allowed on June 30, 2020, shortly before Nebraskanians passed a ballot measure limiting businesses to charging 36% annual interest. The measure was passed with more than 80% support.
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Former state senator Al Davis of Hyannis, a Nebraskans leader for responsible lending who pushed the ballot measure, offered only fake sympathy about the demise of the lending industry. Nebraska.
“Isn’t that a shame!” he said, adding, “They presented themselves as good Samaritans helping people, but they were anything but.”
Davis said he didn’t expect all payday lenders to close, though he expected the number of such businesses to drop significantly. He noted that industry officials predicted ahead of the 2020 vote that some lenders were likely to hang on.
On the other side, Ed D’Alessio, executive director of INFiN, a national trade association representing deferred deposit companies, said the shutdowns were predictable, based on the experience of other states that have imposed similar rate caps.
“Nebraska’s 36% rate cap on deferred deposit loans was never about consumer protection,” he said. “It was about the thinly veiled desire of activists to eliminate a regulated service loved by many.”
D’Alessio predicted that “Nebraska is likely to learn the hard way that illegal lenders thrive under restrictive, arbitrary, and antiquated rate caps, with little consumer protection.”
Payday loans, also known as cash advances, check advances, or deferred deposit loans, are a type of short-term, high-cost borrowing that people use to obtain small amounts immediate money.
Lenders typically charge a 15% fee, rather than traditional interest, for a short period. For example, a customer could write a check for $100 dated two weeks in the future, and the lender would give that person $85 in cash. When translated into an annual interest rate, the results can be surprising.
A state report showed that Nebraska payday borrowers ended up paying an average annual rate of 405% in 2019. The 1994 state law authorizing payday lenders in Nebraska exempted them from the general cap on 16% on interest rates.
As a result, borrowers can find themselves 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 approximately 50,000 people took out payday loans in Nebraska in 2019. The average loan was $362, and the average person got 10 loans during the year.
The coalition that called for a rate cap on the ballot and lobbied for its passage included several organizations that work with or advocate for Nebraska’s low-income families, children and seniors — the groups most likely to be affected by payday loan debt.
In response, industry representatives argued that the cap would bankrupt most, if not all, payday lenders and leave customers without good alternatives when they need money.
Kent Rogert, a lobbyist for payday lenders, said the 36% cap meant payday lenders could only earn about $1.38 per $100 lent, which isn’t enough to survive in a business that sees up to 40% of loans in default.
“The amount of money you would earn is less than what it would cost to process these transactions,” he said. “You can’t pay the lighting bill for this.”
Rogert noted that some old deferred deposit businesses may still be open to provide other services, such as cashing paychecks for a fee. He said he didn’t know what former customers were doing now if they needed money fast.
But a 2017 report of the Center for Responsible Lending said research in other states found people were turning to cheaper ways to get cash when the payday loan industry shut down. These include borrowing from family and friends, getting credit card advances, cutting expenses and tapping into savings.
Patricia Herstein, general counsel for the Nebraska Banking Department, cited other options. She said some people might use installment loan companies, which are allowed to charge up to 24% interest on the first $1,000 and 21% thereafter.
Others may have crossed state lines to find payday lenders in Iowa or other states. Some have turned to online lenders, which generally charge very high rates and are not regulated by the state. Herstein said the state agency has filed complaints about online entities and contacted them with mixed success.
She and James Goddard, senior program manager for Nebraska Appleseed, another group that backed the ballot measure, said more Nebraska credit unions were offering small-value loans.
So far, Goddard said, Nebraskanians in need of money seem to be finding ways. He said Appleseed hasn’t heard from community members saying they’re struggling to find alternatives, unlike what they’ve heard from people struggling after taking out payday loans.
“It’s a harmful product that has trapped people in a cycle of debt,” he said.