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Cities, Lenders Resume Battle Over High-Interest Loans

Bill Before Missouri Gov. Mike Parson Would Undermine Municipal Regulations

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Above image credit: Abby Zavos worked hard to pass an ordinance regulating high-interest lending in Liberty, but fears her efforts will be undercut. (Barb Shelly | Flatland)

Tower Loan in Liberty is sandwiched in a strip mall, a payday lending shop on its left and a tax preparation office on its right.

It offers quick cash with few questions asked. It is one of two businesses suing Liberty over the city’s attempt to curb high-interest lending. And, along with other installment lenders, Tower Loan is at the center of concerns about a piece of legislation currently sitting on the desk of Missouri Gov. Mike Parson.

On the Friday leading up to the Memorial Day weekend, Jeff Mahurin spent only a few minutes inside the Liberty branch office. “I was just paying off what I owed,” he said. “I got my stimulus check.”

Mahurin, who is in a jobs training program, said he took out a loan in October after his wife was injured on her job and they were short of cash to pay bills. He said he borrowed $2,000 and thought he paid less in interest than he would have by financing purchases on a credit card, which he doesn’t have.

But annual percentage interest rates at businesses like Tower can easily exceed 100% and are much higher than what a bank or credit union would charge. They are the reason Liberty residents last year sought an ordinance that regulates short-term lenders. Among other things, it requires them to pay $5,000 annually for a permit.

“We wanted to do our part in squelching a practice that harms the people of Liberty and harms our small businesses by draining money out of the community with high interest rates and fees,” said Harold Phillips, a City Council member. 

The movement got started at a Martin Luther King celebration at William Jewell College in Liberty. Susan McCann, an Episcopal minister and board member of Communities Creating Opportunity, a social justice group, challenged an audience to seek causes that would reduce harm to the poor and people of color. Citizens got together and decided to tackle lending practices that dig people into debt traps.

After months of research, the Northland Justice Coalition drafted a petition and gathered signatures. Liberty City Council members placed the issue on a ballot, and voters passed it in November with 82% approval. 

Along with the permit fee, the ordinance requires payday lenders, title loan shops and installment lenders to post conspicuous notices informing customers of interest rates and fees and possible consequences of loan defaults. The ordinance also limits the number of high-interest lenders that can operate in Liberty, a city with a population of just more than 30,000, although existing businesses are grandfathered in.

“We were ecstatic,” said Abby Zavos, who chaired the campaign. “This was democracy in action. It felt like the way things are supposed to work.” 

Now, with the ordinance threatened on two fronts, Zavos is less ebullient. “I can’t say I’m surprised,” she said. “But it’s really discouraging.”

Tough Sell

Reining in predatory lending practices is a tough sell in Missouri. The legislature has turned back repeated attempts to follow the lead of multiple other states and cap interest rates.

Lenders here can charge fees and interest up to 75% of the value of a loan. But a more standard indicator of what a loan actually costs is the annual percentage rate — the percentage of the principal that a borrower could potentially pay in a year’s time, taking into account monthly payments and fees. 

The latest two-year survey of payday lenders by the state Division of Finance, released in 2019, showed an average annual percentage rate of 527%. 

A broad coalition of faith and civic groups tried unsuccessfully in 2012 to gather enough signatures to force a statewide vote on high-interest lending reform. Their proposal capped the annual percentage rate at 36%.

Their efforts met with intense resistance from the industry. Paid “blockers” harassed volunteers gathering signatures. A law firm falsely told church leaders their nonprofit status could be in jeopardy if they vocally supported the reforms. A signature gatherer in Springfield found his car window smashed and petitions with 5,000 signatures missing.

Two well-funded political action committees organized to fight the initiative. One was Stand Up Missouri, a PAC funded exclusively by installment lenders.

While payday loans usually require payment in full after two or four weeks — often forcing the borrower to take out a new loan — installment loans spread payments out over longer periods. While some installment loans enable low-income consumers to get out of debt in a reasonable time frame, they still can exceed triple digits. 

The Center for Responsible Lending warned in a 2015 report that lenders were turning to installment loans to skirt state regulations on payday loans and car title loans. “Abusive lenders see installment loans as a new front,” the report said. “Regulators and policymakers should beware.”

That dynamic was already playing out in Missouri. Although installment lenders are regulated by a different section of law than payday lenders and take pains to set themselves apart, the two sectors are united in opposition to interest rate caps and other regulations. Their political action committees together spent more than $2 million to defeat the 2012 citizen initiative. 

Stand Up Missouri still exists as a political action committee. Tower Loan, a national company with branches in Missouri, donated $4,875 to its coffers in March 2019. World Acceptance Corp., one of the nation’s largest installment lenders, was even more generous. It donated $9,500 in December 2018. The committee pays a lobbyist to stand guard against any attempts to regulate installment loans.

When Liberty did just that, installment lenders struck back on two fronts — in court and in the Missouri legislature.

World Acceptance Corp. and Tower Loan sued the city in March, following a squabble over permits.

The city contended that, since the businesses loan money at interest rates exceeding 45%, they are subject to the ordinance and need a permit to operate. 

The lenders claimed they are protected by a section of state law that says cities and local governments cannot “create disincentives for any traditional installment loan lender from engaging in lending…”

The $5,000 permit fee and other ordinance requirements qualify as disincentives, the lawsuit says.

“My clients fall under that statute,” said Marc Ellinger, a Jefferson City lawyer who is representing World Acceptance Corp. and Tower Loan. “The state says local governments can’t do anything to discriminate against traditional installment lenders.”

Dan Estes, Liberty’s finance director, said the city planned to file a response to the lawsuit this week or next. He said the city sought permits from seven lending businesses. Five of them paid the fee. World Acceptance Corp. paid under protest and has demanded a refund. Tower Loan has not paid.

John Miller, a lawyer who worked with the Northland Justice Coalition to craft the ordinance, said the defining qualification is the 45 annual percentage interest rate. 

“For those of us who consider loans above that to be predatory, that includes payday lenders and installment lenders,” he said. “Effectively, in Missouri, there is no cap on either payday loans or installment loans.”

The legislature’s refusal to cap interest rates and otherwise regulate high-interest lenders has prompted cities like Kansas City, St. Louis, Independence and Blue Springs to enact zoning restrictions and other regulations. Those local laws either don’t affect installment lenders or don’t require permits. But an ordinance that will go before Springfield voters in August does both.

On Nov. 3, 2019, two days before Liberty voters approved their regulations, Stand Up Missouri gave a $1,000 campaign contribution to Curtis Trent, a Republican legislator from Springfield. Six months later, on the same day the Springfield City Council voted to send its short-term lending ordinance to the ballot, Trent slipped an amendment into a bulky piece of financial legislation set for a vote in Jefferson City. 

Trent’s amendment basically sharpens the language of the statute that the installment lenders cited in their lawsuit against Liberty. It says that local governments cannot create any disincentive for traditional installment lenders and adds that “any fee charged to any traditional installment loan lender that is not charged to all lenders licensed or regulated by the division of finance shall be a disincentive in violation of this section.”

Both the House and Senate passed Trent’s amendment without the usual hearing or a full analysis of its potential impact. 

“I think it’s very clearly an effort by the installment lenders to avoid the fee in the Liberty ordinance,” Miller said. “They’ve viewed themselves as outside municipal ordinances. They want to shut this down, and the best way to do that is to get something enacted at the state level.”

Trent did not respond to an interview request for this story. He told the Kansas City Star his amendment was “a minor tweak” and would not affect municipal restrictions on payday lending.

Consumer advocates aren’t so sure. Many lending businesses offer both payday and installment loans, Miller pointed out. 

Even without state regulations, the number of traditional storefront payday lending businesses in Missouri has dropped steeply, from 1,315 in 2011 to 662 in last year, according to the Division of Finance report.

Some of the decline coincides with the rise of on-line lending. But the conversion from payday loans to installment loans has been a factor in Missouri and nationwide, said Lisa Stifler, director of state policy for the Center for Responsible Lending. 

Partly because of looming state and federal regulations, “we’ve seen a shift around the country from the short term payday loan product to a longer-term, high-cost installment product,” she said.

Constant Battle

It’s unclear so far how the devastating economic consequences of the COVID-19 pandemic have affected the short-term lending industry. Payday and installment lenders stayed open in the Kansas City region during the shutdown, as most governments classified them as financial institutions and therefore essential businesses. But people have been postponing doctors visits, shopping less and spending less on car repairs, which could reduce the need for quick cash. 

Still, lenders are letting customers know they are available. World Acceptance Corp., which also operates under the name World Finance, has posted a message on its website, assuring customers that “World Finance is committed to being responsive to your needs as the situation evolves.”

Meanwhile, social justice groups like Communities Creating Opportunity are urging Parson not to sign the bill that would exempt installment lenders from local regulations. 

“The interests of these large corporations can’t be more important than what the people who live in communities want,” said Danise Hartsfield, CCO’s executive director.

“It’s a constant battle, and of course the great frustration is with the Missouri legislature,” Miller said. “It’s a captive of the predatory lending industry.”

Zavos, who watches state legislation carefully, acknowledged she wasn’t optimistic that the ordinance she worked hard to get passed would survive the threat from the installment lenders.

“It was just a really good, fair, great law,” she said, as though it was already gone.

Flatland contributor Barbara Shelly is a freelance writer based in Kansas City.

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