Economic Progress Institute hosts policy briefing on predatory lending

STATE HOUSE – The Economic Progress Institute hosted a policy briefing on predatory lending practices to legislators, staffers and members of the public Thursday. Rep. Karen Alzate, who has championed legislation to eliminate predatory payday lending in Rhode Island, invited EPI to present the briefing at the State House.

Rhode Island law caps the maximum interest of small loans at 36% annual percentage rate for loans of $300 or less, with lower rates for larger loans. There are loopholes in this law, and EPI discussed three methods used by payday lenders in Rhode Island to charge far higher rates. The most common method is when storefront payday lenders register as deferred deposit providers, or “check cashers” under an exemption in Rhode Island law, allowing them to charge an affective APR of 260% on small loans. Representative Alzate (D-Dist. 60, Pawtucket, Central Falls), and Senate Deputy Senate Majority Whip Ana B. Quezada (D-Dist. 2, Providence) have introduced legislation (2024-H 7211, 2024-S2141) that would amend state law to remove this loophole that allow deferred deposit providers to charge triple-digit interest on loans.

“Predatory lenders, like payday lenders, target low-income Rhode Islanders and charge them triple-digit interest rates, costing our communities millions of dollars annually and trapping our neighbors in cycles of debt,” said Alan Krinsky, EPI director of research and fiscal policy. “Congress acted in 2006 to protect active duty military personnel by capping payday loans to such individuals at 36%, and it is time for all Rhode Islanders to receive the same financial protection. We would not tolerate targeting small business owners with triple-digit interest rates and should not tolerate this for Rhode Islanders.”

Another pay day lending practice are rent-a-bank schemes, in which a Rhode Island payday lending institution pays a bank chartered in a state that allows higher interest rates on loans than Rhode Island to formally underwrite the loan. This practice is allowed under the federal Depository Institutions Deregulation and Monetary Control Act of 1980, which allows state-charted banks to follow the laws of the state they are charted in, rather than the one they are doing business in. Rhode Island could join Iowa and Colorado in opting out of the DIDMCA to close this loophole.

The third method of payday lending occurring in Rhode Island are Earned Wage Advances, which provide high interest payday loans through mobile apps. This is a relatively new industry nationwide, and there is currently no database of EWA use in Rhode Island, though the EPI has heard reports of it being used in the healthcare and fast-food industries. Unlike the other methods of payday lending described at the briefing, this practice is likely already illegal under Rhode Island law.

In attendance were General Treasurer James A. Diossa, Sens. Tiara Mack (D-Dist. 6, Providence) and Melissa A. Murray (D-Dist. 24, Woonsocket, North Smithfield), Reps. Cherie L. Cruz (D-Dist. 58, Pawtucket), Leonela Felix (D-Dist. 61, Pawtucket), Rebecca Kislak (D-Dist. 4, Providence), Brandon Potter (D-Dist. 16, Cranston) and Teresa A. Tanzi (D-Dist. 34, South Kingstown, Narragansett), along with staff members from the Governor’s and Attorney General’s and Treasurer’s offices, journalists and members of the public.

Ending predatory payday lending practices has broad majority support across the political spectrum in Rhode Island. A 2022 poll conducted by the Center for Responsible Lending showed that Rhode Islanders from all political parties supported a 36% rate cap on all loans by a 49-point margin. Better short-term loan options already exist for Rhode Islanders from local credit unions, banks and community financial groups all offering small loans, with low fees and interest rates ranging from 5% to 30%.

            This is the first of three policy briefings on topics of economic interest to low- and modest-income Rhode Islanders that EPI will host at the State House this legislative session.