Payday loans in the United States
Encyclopedia
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
are a growing industry. Regulation of lending institutions is handled primarily by individual states, and the industry exists atop an active and shifting legal landscape. Lenders lobby to enable payday lending practices, while opponents of the industry lobby to prohibit the high cost loans in the name of consumer protection. In the United States, finance charges on payday loans are typically in the range of 15 to 30 percent of the amount for the two-week period, which translates to annual percentage rate
Annual percentage rate
The term annual percentage rate , also called nominal APR, and the term effective APR, also called EAR, describe the interest rate for a whole year , rather than just a monthly fee/rate, as applied on a loan, mortgage loan, credit card, etc. It is a finance charge expressed as an annual rate...
s (APRs) from 390 to 780.
Payday lending is legal and regulated in 37 states. In 13 states it is either illegal or not feasible, given state law. When not explicitly banned, laws that prohibit payday lending are usually in the form of usury
Usury
Usury Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate . In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law...
limits: hard interest rate caps calculated strictly by annual percentage rate
Annual percentage rate
The term annual percentage rate , also called nominal APR, and the term effective APR, also called EAR, describe the interest rate for a whole year , rather than just a monthly fee/rate, as applied on a loan, mortgage loan, credit card, etc. It is a finance charge expressed as an annual rate...
(APR). Since Oct. 1, 2007 a federal law has capped lending to military personnel at a maximum of 36% APR as defined by the Secretary of Defense.
US loan process
If the account is short on funds to cover the check, the borrower may face a bounced check fee from their bankBank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
in addition to the costs of the loan, and the loan may incur additional fees and/or an increased interest rate as a result of the failure to pay. For customers who cannot pay back the loan when due, members of the national trade association are required to offer an extended payment plan at no additional cost. In Washington and some other states, extended payment plans are required by state law.
Regulation
The following states have made payday loans illegal:- Arizona
- Arkansas
- Connecticut
- Georgia
- Maine
- Maryland
- Massachusetts (not strictly illegal but highly regulated)
- New Hampshire
- New Jersey
- New York
- North Carolina
- Pennsylvania
- Vermont
- West Virginia http://www.affil.org/consumer_rsc/payday.php#states
In the United States, many states have usury
Usury
Usury Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate . In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law...
laws which forbid interest rates in excess of a certain APR
Annual percentage rate
The term annual percentage rate , also called nominal APR, and the term effective APR, also called EAR, describe the interest rate for a whole year , rather than just a monthly fee/rate, as applied on a loan, mortgage loan, credit card, etc. It is a finance charge expressed as an annual rate...
. Some payday lenders have succeeded in getting around usury laws in some states by forming relationships with nationally-chartered banks based in a different state with no usury ceiling (such as South Dakota or Delaware). This practice has been referred to as "rate exportation", the "lender/servicer" model, or the "rent-a-bank" model. Under the legal doctrine of interest-rate exportation, established by Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp.
Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp.
Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp. , is a unanimous 1978 U.S. Supreme Court decision holding that state anti-usury laws regulating interest rates cannot be enforced against nationally-chartered banks based in other states...
, the loan is governed by the laws of the state where the bank is chartered, regardless of the borrower's state of residence. This is the same doctrine that allows credit card issuers based in South Dakota and Delaware — states that abolished their usury laws — to offer credit cards nationwide. As federal banking regulators became aware of this practice, they began prohibiting these partnerships between commercial banks and payday lenders. The FDIC still allows its member banks to participate in payday lending, but it did issue guidelines in March 2005 that are meant to discourage long term debt cycles by transitioning to a longer term loan after six payday loan renewals. As a result, no federally insured banks engage in the business of payday lending as of 2007 using an agency model.
For usury laws to be effective, they need to include all loan fees as part of the interest. Otherwise, lenders can charge any amount they want as fees and still claim a low interest rate. State laws in the United States generally preclude charging of fees other than those expressly permitted by law, and the federal Truth In Lending Act requires disclosure of all fees.
Some states have laws limiting the number of loans a borrower can take at a single time. This is currently being accomplished by single, statewide realtime databases. These systems are required in Florida, Michigan, Illinois, Indiana, North Dakota, New Mexico, Oklahoma, South Carolina, and Virginia. These systems require all licensed lenders to conduct a real time verification of the customer's eligibility to receive a loan before conducting a loan. Reports published by state regulators in these states indicate that this system enforces all of the provisions of the state's statutes. Some states also cap the number of loans per borrower per year (Virginia), or require that after a fixed number of loan renewals, the lender must offer a lower interest loan with a longer term, so that the borrower can eventually get out of the debt cycle. Borrowers can circumvent these laws by taking loans from more than one lender if there is not an enforcement mechanism in place by the state. Some states allow that a consumer can have more than one loan outstanding (Oklahoma).
Federal regulation
In the US, although payday lending is primarily regulated at the state level, the United States CongressUnited States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....
passed a law in October 2006 becoming effective on Oct. 1, 2007 that caps lending to military personnel at a maximum of 36% APR as defined by the Secretary of Defense. The Defense Department called payday lending practices "predatory
Predatory lending
Predatory lending describes unfair, deceptive, or fraudulent practices of some lenders during the loan origination process. While there are no legal definitions in the United States for predatory lending, an audit report on predatory lending from the office of inspector general of the FDIC broadly...
", and military officers cited concerns that payday lending ruined low-paid enlisted men and women's finances, jeopardized their security clearances, and even interfered with deployment schedules to Iraq.
Some federal banking regulators and legislators seek to restrict or prohibit the loans not just for military personnel, but for all borrowers, because the high costs are viewed as a financial drain on the working and lower-middle class populations who are the primary borrowers.
Illinois Representative Luis Gutiérrez
Luis Gutiérrez
Luis Vicente Gutiérrez is an American politician and the U.S. Representative for , serving since 1993. Gutiérrez was the first Latino to be elected to Congress from the Midwest. From 1986 until his election to Congress he served as a member of the Chicago City Council representing the 26th ward...
introduced the "Payday Loan Reform Act of 2009" to the 111th Congress
111th United States Congress
The One Hundred Eleventh United States Congress was the meeting of the legislative branch of the United States federal government from January 3, 2009 until January 3, 2011. It began during the last two weeks of the George W. Bush administration, with the remainder spanning the first two years of...
. Although Gutierrez introduced a bill in 2007 which was supported by consumer activism
Consumer activism
Consumer activism is activism undertaken on behalf of consumers, to assert consumer rights.-Objectives and tactics:Goals include making goods and services available to consumers safer, better quality, environmentally friendly, and more readily available....
nonprofits, the 2009 bill was heavily criticized by these groups, who nevertheless noted that the stricter state regulation would not be preempted. The bill would allow for rates of 780 percent APR. Gutierrez defended the bill by pointing out that as of 2009, in 23 states borrowers have no protection from payday lenders, and argued that only the proposed bill could pass. The payday loan company QC Holdings was Luis Gutiérrez
Luis Gutiérrez
Luis Vicente Gutiérrez is an American politician and the U.S. Representative for , serving since 1993. Gutiérrez was the first Latino to be elected to Congress from the Midwest. From 1986 until his election to Congress he served as a member of the Chicago City Council representing the 26th ward...
's largest 2007-2008 election contributor with a contribution of about $10,000. The "C.L.E.A.R. Act" submitted by California's Joe Baca
Joe Baca
Joseph N. "Joe" Baca is the U.S. Representative for , serving since 2003. He is a member of the Democratic Party. The district, numbered as the 42nd from 1999 to 2003, is located in southwestern San Bernardino County and includes Fontana, Rialto, Ontario and parts of the city of San...
April 1, 2009 is almost identical.
Regulation in the District of Columbia
Effective January 9, 2008, the maximum interest rate that payday lenders may charge in the District of Columbia is 24 percent, which is the same maximum interest rate for banks and credit unions. Payday lenders also must have a license from the District government in order to operate. As a result of the interest-rate cap enacted by D.C., all licensed payday lenders have withdrawn from the market, and no lawful payday loans are presently available in D.C.
Banning in Georgia
Georgia law prohibited payday lending for more than 100 years, but the state was not successful in shutting the industry down until the 2004 legislation made payday lending a felony, allowed for racketeering charges and permitted potentially costly class-action lawsuits.Regulation in New Mexico
New Mexico caps fees, restricts total loans by a consumer and prohibits immediate loan rollovers, in which a consumer takes out a new loan to pay off a previous loan, under a law that took effect November 1, 2007. A borrower who is unable to repay a loan is automatically offered a 130-day payment plan, with no fees or interest. Once a loan is repaid, under the new law, the borrower must wait 10 days before obtaining another payday loan. The law allows the term of a loan to run from 14 to 35 days, with the fees capped at $15.50 for each $100 borrowed58-15-33 NMSA 1978. There is also a 50-cent administrative fee to cover costs of lenders verifying whether a borrower qualifies for the loan, such as determining whether the consumer is still paying off a previous loan. This is accomplished by verifying in real time against the approved lender compliance database administered by the New Mexico regulator. The statewide database does not allow a loan to be issued to a consumer by a licensed payday lender if the loan would result in a violation of state statute. A borrower's cumulative payday loans cannot exceed 25 percent of the individual's gross monthly income.Withdrawal from North Carolina
In 2006, the North Carolina Department of Justice announced the state had negotiated agreements with all the payday lenders operating in the state. The state contended that the practice of funding payday loans through banks chartered in other states illegally circumvents North Carolina law. Under the terms of the agreement, the last three lenders will stop making new loans, will collect only principal on existing loans and will pay $700,000 to non-profit organizations for relief.Operation Sunset in Arizona
Arizona usury law prohibits lending institutions to charge greater than 36% annual interest on a loan. On July 1, 2010, a law exempting payday loan companies from the 36% cap expired. State Attorney General Terry GoddardTerry Goddard
Samuel Pearson "Terry" Goddard III was the Attorney General of Arizona, from 2003 to 2011, who also served as Mayor of Phoenix, Arizona from 1984 to 1990....
initiated Operation Sunset, which aggressively pursues lenders who violate the lending cap. The expiration of the law caused many payday loan companies to shut down their Arizona operations, notably Advance America.
See also
- Community Financial Services Association of AmericaCommunity Financial Services Association of AmericaThe Community Financial Services Association of America is the national organization dedicated to advancing financial empowerment for consumers through small dollar, short-term loans...
- Buckeye Check Cashing, Inc. v. CardegnaBuckeye Check Cashing, Inc. v. CardegnaBuckeye Check Cashing Inc. v. Cardegna is a 2006 United States Supreme Court decision concerning contract law and arbitration...