A version of this story was co-published with the St. Louis Post-Dispatch.
In 2009, consumer advocates in Washington State decided to try a new approach to regulating payday loans. Like reformers in other states, they’d tried to get the legislature to ban high-cost loans outright — but had hit a brick wall. So, instead, they managed to get a law passed that limited borrowers to no more than eight payday loans in one year.
Lenders would still be free to charge annual rates well into the triple digits, but the law would eliminate what critics say is the worst aspect of payday loans: borrowers caught in a cycle of debt by taking out loans over and over.
Lenders Reaped a Majority of Their Fees From a Minority of Repeat Borrowers
Two-thirds of borrowers in 2009 took out eight or fewer loans...
Total Borrowers, by number of loans in 2009
...but two-thirds of all loans went to borrowers who took out nine or more loans.
Total Loans Issued, by number of loans per borrower in 2009
At least in Washington, most payday loan borrowers didn’t take out eight loans in a year. Data from 2009, the last year before the reform bill went into effect, shows how many people in 2009 took out one to four loans, five to eight loans, and so on. Two-thirds of these borrowers took out eight or fewer loans in 2009.
But the people who take out only a few payday loans do not drive industry profits. That becomes clear when, instead of looking at the number of people, one looks at the number of loans. Then the trend flips: About two-thirds of loans went to borrowers who took out nine or more loans in 2009.
In other words, one-third of payday loan borrowers accounted for two-thirds of payday loans made in Washington State in 2009.
The Consumer Financial Protection Bureau found a similar imbalance when it studied a national sample of payday loans earlier this year: Lenders reaped three-quarters of their loan fees from borrowers who had more than 10 payday loans in a 12-month period.
As expected, Washington’s reform has not affected most borrowers. According to the 2011 report from state regulators, only about 24 percent of borrowers had taken out the maximum eight loans over a 12-month period.
But the total number of payday loans has plummeted. In 2009, Washington borrowers took out more than 3.2 million payday loans. In 2011, the last year for which data is available, the number had plunged to 856,000.
During the same time, the number of payday loan stores in the state dropped by 42 percent.
The law “worked way better than we expected,” said Marcy Bowers, director of the nonprofit Statewide Poverty Action Network.
Meanwhile, the industry, which opposed the 2009 law, has recently pushed legislation to allow high-cost installment loans in the state. As we report, that’s a typical response by the industry to unwanted legislation.
Washington’s law has proven a model for other states. Delaware passed a law in 2012 that limited payday loans to five in a 12-month period. Earlier this year, consumer advocates pushed a similar law in California, but it stalled.
Asked for comment about Washington’s law, Amy Cantu, a spokeswoman for the Community Financial Services Association, the payday lenders’ trade group, said lenders work closely with state regulators and cited the group’s best practices, which include offering customers a payment plan when they want more time to repay a loan.