Iowa Advances PayDay Lending Bill

A bill that would cap interest rates on short-term consumer loans advanced out of Senate subcommittee last week. The bill will now go before the entire chamber this week.

The state Division of Banking says that there are 231 Delayed Deposit Services Businesses in Iowa. The Division released an amazing metric about the concentrated use of these loans among a select group of customers. At any one store, the average number of loans made to each customers was 11.88 in the last year.

The new bill would cap interest rates at 36 percent. The price of loans in Iowa is high: the average interest rate, when calculated on an annual basis, is 292 percent. Breaking it down, that means that a $500 loan made for two weeks would cost, on average, about $56. A customer that made 12 loans would have paid $673. Under the new legislation, the 12-loan customer would see his or her interest obligations drop to just $83.

Were the bill to pass, it is highly unlikely that any payday lender would stick around to earn that $83. While it is plausible that some might eek out a business at that margin, most will abdicate and move on. That has been the experience in other states. The new rate brings loan prices in line with the most expensive credit card. Montana’s new interest rate cap went into effect on Jan. 1, 2011. By then, seventy percent of registered payday lenders had already shuttered their Montana stores.

It will be interesting to see if Iowa’s new payday law prompts Wells Fargo, which has a substantial concentration of staff in Des Moines, to take its Direct Deposit Advance product out of its branches in the state. Wells charges $2 for every $20 that it advances to consumers. At that rate, the product easily exceeds the usury cap. Wells may argue that its status as a national bank allows it to evade state consumer protection laws. Such an argument would have legal merit, but it would also strike many as politically tone deaf. Wait and see.