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Founder, CFP®

UPDATED: May 17, 2013

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Rhode Island may be the next state to dramatically lower their payday loan interest rate cap, depending on how the General Assembly votes on a new proposal.

The bill, which was presented to the state’s General Assembly on Wednesday, would lower the payday loan interest rate cap to 36 percent. Under the current law, lenders can charge an APR of 260 percent, or $10 for every $100 borrowed.

Supporters of the bill include Treasurer Gina Raimondo and the Rhode Island Payday Lending Reform Coalition. Ben Coleman, a Rhode Island math teacher and representative of the coalition, said that he did not believe the bill would pass.

“The payday loan companies have pumped a ton of money into this,” Coleman said. “Advance America, at least, had pumped a ton of money into their campaign.”

Despite the strength of the payday loan lobby in Rhode Island, Coleman said he could see parties reaching a compromise. He said Rep. Lisa Baldelli-Hunt’s proposal, which would only lower the interest rate cap to 130 percent, was “more likely” to be approved, though the coalition hopes to lower the interest rate enough to drive lenders out of the state.

“Our goal is to get that interest rate lowered to 36 percent,” Coleman said. “And at 36 percent the payday loan lending model collapses.”

Payday loan lenders are fully aware of this. If the bill passes, payday loan lenders would be forced to close down, according to Jamie Fulmer of Advance America.

“It’s not reform at all, it’s industry prohibition,” Fulmer said. “The unfortunate reality is that it would force Advance America and all of our competitors to close our doors.”

According to Fuller, if payday loan rates were capped at 36 percent and lenders were driven out of the state, it would open the door to unregulated lenders.

 “We think there’s a way to balance the consumer’s important need for credit with equally important consumer protections, so that consumers get a product that’s safe and regulated,” Fuller said.

And while many argue that Rhode Island is the only state in New England that allows payday lending, Fulmer argues that low interest rate caps have only driven out legitimate lenders. “In reality, Rhode Island is the only state in New England that has regulated payday lending,” Fulmer said.

Under a 36 percent interest rate, the fee charged on each $100 would drop from $10 down to $1.38 which, according to Fulmer, would not be enough to pay overhead fees for 20 stores the company runs within the state, or to pay wages for their 80 Rhode Island employees. Fulmer added that the state legislator recently slashed the fee cap from $15 for every $100 to the current rate of $10 for every $100 borrowed.

“That would be 66 percent of our fees slashed over the last three years, but our costs have remained the same,” Fulmer said. “This whole argument is devoid of any economic reality.”

Payday loan reform advocates seem to be more focused on the economic realities of borrowers. The reform coalition recently convinced a local credit union to offer pseudo-payday loans. The credit union charges a 24 percent interest rate, not including a $20 application fee, and offers a 90-day repayment schedule, Coleman said.

Coleman acknowledged that, for most borrowers with poor credit, there are no alternatives to payday loans. However, he hopes legislators will vote in favor of the bill when voting is scheduled.

“The question remains, how poor do legislators want poor Rhode Islanders to be?” Coleman said.