Delaware lawmakers to take aim at payday loan businesses

DOVER — Several lawmakers are making plans to introduce legislation next January that would curb the payday loan industry in Delaware.

Payday loans are short-term loans with high interest rates, often used by lower-income people trying to make ends meet until their next paycheck.

Supporters say the industry provides a vital service for many hard-working, low paid individuals.

But critics counter these arrangements can take advantage of people struggling to get by.

The payday loan businesses can also charge an interest rate that, in the words of a Delaware judge in a recent court ruling, “shocks the conscience.”

Rep. Helene Keeley, D-Wilmington, is among those legislators pushing a proposal to cap interest rates at 100 percent on short-term loans.

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Rep. Helene Keeley

“We’re not trying to put them out of business,” she said of lending companies.

Legislators introduced the bill to cap interest rates on the last day of session this year, intending it to serve as a warning shot to unscrupulous lenders.

The sponsors hope to negotiate with lending businesses over the summer and fall to create something a “little bit more reasonable for the working families out there that have a need for these short-term loans,” said House Speaker Peter Schwartzkopf, D-Rehoboth Beach.

He cited a Court of Chancery case from earlier this year in which the ruling judge castigated a lending company as evidence the General Assembly needs to act.

Vice Chancellor J. Travis Laster ordered National Financial LLC to pay Gloria James more than $334,000 — primarily for lawyers’ fees — over a payday loan case. Ms. James, who was a hotel cleaner when she took out the loan in 2013, agreed to pay back $1,820 over a year in return for borrowing $200. She eventually defaulted.

Calling the contract “oppressive,” Vice Chancellor Laster wrote National Financial dodged the state’s payday loan laws.

“When parties have ordered their affairs voluntarily through a binding contract, Delaware law is strongly inclined to respect their agreement, and will only interfere upon a strong showing that dishonoring the contract is required to vindicate a public policy interest even stronger than freedom of contract. ‘As a matter of ordinary course, parties who sign contracts and other binding documents, or authorize someone else to execute those documents on their behalf, are bound by the obligations that those documents contain,’” he wrote.

“But as with many areas of the law, there are countervailing principles that prevent an indisputably important and salutary doctrine from operating as a tyrannical absolute. One such ground is unconscionability, traditionally defined as a contract ‘such as no man in his senses and not under delusion would make on the one hand, and no honest or fair man would accept, on the other.’”

Delaware approved legislation in 2012 that limited borrowers to five payday loans over the course of a year. Many states have laws regulating the industry while several prohibit it outright.

According to the Pew Charitable Trusts, about 12 million Americans use payday loans annually, spending on average $520 to borrow $375.

Lawmakers said they believe most lending businesses are honest and are willing to keep an eye on those that are not in the interest of fairer treatment for customers.

“There is also a point at which people are absolutely desperate and they’ll do whatever they can obtain money, and unfortunately some of these predatory lenders are taking advantage of that and making it a devastating environment for these people,” Rep. Michael Ramone, R-Pike Creek Valley, said.

“That’s not the way the system is supposed to work. There’s a lot of room for great payday lenders to work within the parameters of reasonableness and help people and then there’s the ones trying to take advantage of people.”

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