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Legal and Legislative Status of the Payday Lending

Payday lenders, thwarted by state regulators and the courts, are expanding their use of partnerships with banks to make loans that violate state usury laws, small loan rate caps, and even payday loan state legislation. Rent-a-bank payday lenders seek to benefit from bank privileges despite warnings from federal regulators and enforcement actions by state Attorneys General, according to a new report by Consumer Federation of America and the U. S. Public Interest Research Group.

"Big payday cash advance lenders don't want to comply with state laws designed to limit their triple-digit interest rates, so they are renting bank charters in a cynical attempt to avoid state consumer protections," said Jean Ann Fox, Director of Consumer Protection for CFA. "Check cashers, pawnshops, and payday lenders are attempting the biggest bank powers heist of all times."

In a typical payday loan, a consumer writes a personal check for $230 to borrow $200 for two weeks ("until payday"). The Annual Percentage Rate (APR) on this loan is 390%. At the end of the two-week period, the consumer often extends the loan by paying the $30 fee to carry it for two more weeks. Consumers who cannot cover the deposited check are faced with bounced check fees from both the lender and the bank, added Ms. Fox.

"Predatory triple-digit payday loans threaten vulnerable consumers in this economic downturn," said Edmund Mierzwinski, Consumer Program Director for U.S. PIRG. "We urge Congress and the states to ban predatory financial practices such as holding checks as ransom for fast loans."

The new report, "Rent-A-Bank Payday Lending," surveys 235 payday lenders in 20 states and the District of Columbia. It also analyses the status of payday lending laws around the country and reports on the growing use of bank partnerships by lenders.

Key Survey Findings

Payday lending is now a booming business, with 65 million transactions being made by up to 24,000 large and small payday loan outlets. The industry estimates that up to 10 million American households will pay $2.4 billion in fees this year for two-week loans.
Nineteen states and two territories have laws that do not authorize loans based on checks at triple-digit interest, while 25 states and the District of Columbia have authorized payday loans. Another six states have no cap on charges for credit, permitting payday lending without any state law limits on fees or loan terms.
The national average APR for surveyed loans was 470%, with an average fee of $18.28 to borrow $100 for two weeks. APRs quoted ranged from 182% to 910% and fees ranged from $10 to $35 per $100 borrowed.
"It is obvious that competition and state limits are failing to protect payday loan borrowers," Ed Mierzwinski said. "Over half the surveyed lenders in states that cap rates are charging at or above the legal maximum."

The most common APR found was 390%, charged by 30% of all stores, followed by 520% charged by 18% of all stores. Another 21% of stores charged APRs clustered between 442-459%.
Consumers have a hard time shopping for payday loans by price, since only 32% of lenders disclosed a nominally accurate Annual Percentage Rate on charts or brochures in their stores. Only 22% of stores disclosed both fees and APRs in their stores.
Over three quarters of surveyed stores allow a consumer to renew or rollover unpaid loans, either by paying the finance charge to extend the loan or accepting a new check for another loan as soon as the old check was redeemed for cash.
State Legislative Status

The report summarizes state legislative activity in 2000 and 2001. States are showing greater reluctance to authorize payday loans with North Carolina allowing its payday loan law to sunset in August. Other states that refused to pass industry-friendly authorizing legislation this year include Alabama, Virginia, Maryland, Oklahoma, New York, Georgia, Texas, and California. Only Florida and North Dakota legalized payday lending in 2001. In the last two years, Maryland and Colorado adopted anti-broker or loan arranger laws in order to keep control over local companies that broker loans for out of state banks.

Rent-a-Bank Payday Lending

Pawn shops, check cashers and payday lenders are attempting to claim the rights of banks to charge rates permitted in the bank's home state. Despite warnings from federal bank regulators, bank involvement in payday lending is growing both in states that retain usury limits, such as Virginia and Indiana, and in states that authorize payday lending such as Colorado and California. Lenders that partner with banks usually charge higher rates, make larger loans, or make repeat loans in violation of state laws. Rent-a-bank payday lenders are facing state enforcement or class action litigation in Colorado, Ohio, Maryland, Florida and Texas. The report details bank and payday loan connections (See attached chart.)

Policy Recommendations and Advice to Consumers

The groups urged the following reforms:

States should enforce existing usury laws and small loan laws and enact anti-broker provisions to keep state control over non-bank local companies. States that have already adopted industry-friendly laws should amend their payday loan laws to lower costs, prevent debt traps, and protect borrowers from coercive collection tactics made possible by the holding of checks as the basis for loans.

Congress and federal bank regulators should stop rent-a-bank arrangements and outlaw the holding of checks drawn on federally insured depository institutions as the basis for small loans.

Banks, thrifts, and credit unions should serve their account customers with fairly priced overdraft protection and credit arrangements.
The groups urged consumers in need of short-term cash to avoid extremely expensive payday loans, and to instead, build up a savings next-egg to cover financial emergencies, seek budgeting and debt management assistance from non-profit consumer credit counseling services, and shop for credit based on both the dollar finance charge and the Annual Percentage Rate.

"Consumers with too much month at the end of the paycheck deserve better legal protection against predatory lenders," Jean Ann Fox concluded. "Lenders who misuse bank charters and who devise tricks and ruses to evade state consumer protections must be stopped."

For more information visit: www.consumerfed.org and www.pirg.org.