By Bill Britt
Alabama Political Reporter
Like so many reforms in Alabama, the implementation of a statewide central database to track payday loans as ordered by Gov. Robert Bentley in 2013 fought its way through the courts to finally become operable in August 2015.
The establishment of the database is seen as a real step toward true reform in the lending industry. For the first time, loans would be tracked by a single statewide system that ensures that individuals are not taking out multiple loans from different lending companies simultaneously.
But there is a flaw, a loophole, critics say, because the central database only includes loans in the amount of $500 or less, meaning that only payday loans are actually covered by the much-acclaimed central database program.
If a loan is $500.01 or more that makes it a small loan, and it is not entered into the system meaning the majority of small loans including those provided by title lenders are not checked leaving a gaping hole for these businesses to make numerous loans to the same individuals, unchecked.
Presently the State allows four categories of small loans:
- Payday loans $500 and under
- Small loans up to $1000
- Mini code loans up to $2000
- Title pawn loans, of these, multiple institutions only payday loans of $500 and under are entered into the central database.
As of a 2015 study, Alabama has more title loan lenders per capita than any other state; yet, these lending institutions are not excluded from the reforms called for by Gov. Bentley in 2013. These companies were intentionally carved out of the database provision due to lobbying efforts and some lawmaker’s business investments.
State records show that the database’s implementation had a strong impact on the payday loan industry and that, since the implementation of an effective central database, there has been a sharp decline in the number of payday licenses.
Additionally, the database is working as originally intended — and the average payback period for these loans is less than two weeks.
While this gives reform proponents encouragement, the fact that loans between $500.01 and $1500.00 are not included in the database falls short of promised reform legislation some had hoped to achieve.
The database program’s success with the payday loan industry is seen as a good first step, but the Bentley administration’s promise of consumer protection did not fully addressed titles loans and small loans between $500.01 and $1500.00.
Consumer advocates believe the next step is to bring these lenders into the central lending database to meet the promise of ensuring citizens are not over-extending themselves with multiple loans.
One of the fundamental reasons for the central database system was to ensure individuals could obtain only one loan at a time protecting consumers from themselves and unscrupulous lenders, which has proven to be effective within the State’s payday lending industry as is shown by the fact that total licensees under the Alabama Small Loan Act have decreased to a six-year low.
Perhaps an unintended consiquence of the database system is it has forced some lenders out of the market altogether.
Total licensees for payday lenders have decreased dramatically, falling to a six-year low with only 711 licensees recorded in 2016, compared to a high of 1,070 in 2011.
The six-year comparison shows:
- December 31, 2011: 1070
- December 31, 2012: 1063
- December 31, 2013: 1043
- December 31, 2014: 999
- December 31, 2015: 836
- December 31, 2016: 711
The decrease in the active number of payday lenders licensees under the Alabama Deferred Presentment Services Act is seen as a proof positive that the policy is effective when lenders are forced to follow it.
Social advocacy groups like Alabama Appleseed and the Southern Poverty Law Center have said the database solution is a positive step but there is more to be done.
When announcing the establishment of the centralized payday loan database Bentley said the statewide database would protect both borrowers and lenders alike.
“If someone has several loans at the same time, and they all carry high interest rates, it’s easy for that person to get trapped in debt. This database can help people avoid that,” Bentley said.
“[T]his database will help lenders make sure that when they issue new loans, they are doing so in compliance with state law,” he added. “The database will provide the information they need to help ensure they are following laws that are already in place.”
However, the administration left out those lenders who make loans from $500.01 to $1,500 who are still making it easy for individuals to be trapped in a spiral of debt.
For now, there is a cause without a champion.
Where is the leader who will take up the challenge of determining all small lenders are treated equally and every Alabamian who needs a small loan is treated fairly?