Payday loans in the United States

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A shop window in Falls Church, Virginia advertises payday loans.
Main article: Payday loan

A payday loan (also called a payday advance, salary loan, payroll loan, small dollar loan, short term, or cash advance loan) is a small, short-term unsecured loan, "regardless of whether repayment of loans is linked to a borrower's payday."[1][2][3] The loans are also sometimes referred to as "cash advances," though that term can also refer to cash provided against a prearranged line of credit such as a credit card. Payday advance loans rely on the consumer having previous payroll and employment records. Legislation regarding payday loans varies widely between different countries and, within the USA, between different states.

To prevent usury (unreasonable and excessive rates of interest), some jurisdictions limit the annual percentage rate (APR) that any lender, including payday lenders, can charge. Some jurisdictions outlaw payday lending entirely, and some have very few restrictions on payday lenders. In the United States, the rates of these loans were formerly restricted in most states by the Uniform Small Loan Laws (USLL),[4][5] with 36%-40% APR generally the norm.

Federal regulation[edit]

Payday lending is legal in 27 states, with 9 others allowing some form of short term storefront lending with restrictions. The remaining 14 and the District of Columbia forbid the practice.[6]

As for federal regulation, the Dodd–Frank Wall Street Reform and Consumer Protection Act gave the Consumer Financial Protection Bureau (CFPB) specific authority to regulate all payday lenders, regardless of size. Also, the Military Lending Act imposes a 36% rate cap on tax refund loans and certain payday and auto title loans made to active duty armed forces members and their covered dependents, and prohibits certain terms in such loans.

The CFPB has issued several enforcement actions against payday lenders for reasons such as violating the prohibition on lending to military members and aggressive collection tactics.[7][8]

The CFPB also operates a website to answer questions about payday lending at Ask CFPB at Consumerfinance.gov

The Consumer Federation of America (CFA), a consumer group opposed to high cost payday lending, maintains a site with up to date information on U.S. state laws regarding payday lenders. Paydayloaninfo.org In addition, some states have aggressively pursued lenders they felt violate their state laws.[9][10]

Payday lenders have made effective use of the sovereign status of Native American reservations, often forming partnerships with members of a tribe to offer loans over the internet which evade state law.[11] However, the Federal Trade Commission has begun aggressively to monitor these lenders as well.[12] While some tribal lenders are operated by Native Americans,[13] there is also evidence many are simply a creation of so-called "rent-a-tribe" schemes, where a non-Native company sets up operations on tribal land.[14][15]

Some states have laws limiting the number of loans a borrower can take at a single time.[citation needed] 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.[citation needed] 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, Washington), 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.[citation needed] 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).

In the US, the Federal Truth in Lending Act requires various disclosures, including all fees and payment terms.

Regulation in the District of Columbia[edit]

Effective January 9, 2008, the maximum interest rate that payday lenders may charge in the District of Columbia is 24 percent,[16] which is the same maximum interest rate for banks and credit unions.[17][18] Payday lenders also must have a license from the District government in order to operate.[17]

Banning in Georgia[edit]

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. In 2013 this law was used to sue Western Sky, a tribal internet lender.[19]

Regulation in New Mexico[edit]

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 borrowed[citation needed]58-15-33 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.[20]

Withdrawal from North Carolina[edit]

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.[21] 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.[22]

Operation Sunset in Arizona[edit]

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.[23] State Attorney General Terry Goddard 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.[24]

Proposed Postal Banking[edit]

Many countries offer basic banking services through their postal systems. The United States Post Office Department offered such a service in the past. Called the United States Postal Savings System it was discontinued in 1967. In January 2014 the Office of the Inspector General of the United States Postal Service issued a white paper suggesting that the USPS could offer banking services, to include small dollar loans for under 30% APR.[25] Both support and criticism quickly followed, however the major criticism isn't that the service would not help the consumer but that the payday lenders themselves would be forced out of business due to competition and the plan is nothing more than a scheme to support postal employees.[26][27]

According to some sources[28] the USPS Board of Governors could authorize these services under the same authority with which they offer money orders now.

See also[edit]

References[edit]

  1. ^ Insley, Jill (2012-07-12). "GE Money refuses mortgages to payday loan borrowers". The Guardian (London). 
  2. ^ Michelle Hodson ,fdic.gov, 18 November 2009, How Payday Loans Work
  3. ^ http://books.google.com/books?id=_8sDAAAAMBAJ&pg=PA43&lpg=PA43
  4. ^ Mayer, Robert (2012). "Loan Sharks, Interest-Rate Caps, and Deregulation". Retrieved 27 August 2014. 
  5. ^ Carruthers, Bruce (2007). "The Passage of the Uniform Small Loan Law". Retrieved 27 August 2014. 
  6. ^ "State Payday Loan Regulation and Usage Rates". 2014. Retrieved 27 August 2014. 
  7. ^ "CFPB Takes Action Against ACE Cash Express for Pushing Payday Borrowers Into Cycle of Debt". 2014. Retrieved 27 August 2014. 
  8. ^ "Our first enforcement action against a payday lender". 2013. Retrieved 27 August 2014. 
  9. ^ "NY Payday Lender Crackdown May Be Tough Act To Follow". 2014. Retrieved 27 August 2014. 
  10. ^ "Online lender settles New York lawsuit amid crackdown on massive 'payday' loans". 2012. Retrieved 27 August 2014. 
  11. ^ "Circumventing State Consumer Protection Laws: Tribal Immunity and Internet Payday Lending". 2012. Retrieved 27 August 2014. 
  12. ^ "Payday Lenders That Used Tribal Affiliation to Illegally Garnish Wages Settle with FTC". 2014. Retrieved 27 August 2014. 
  13. ^ "ribes' Online Lending Faces Federal Squeeze". 2014. Retrieved 27 August 2014. 
  14. ^ "Alleged 'rent-a-tribe' lender temporarily barred from new business in Minnesota". 2013. Retrieved 27 August 2014. 
  15. ^ "The Tribe That Said No". 2014. Retrieved 27 August 2014. 
  16. ^ "Special Feature: Payday Lenders to Comply With New Law: An Effective Consumer Protection Measure". District of Columbia Department of Insurance, Securities and Banking. December 18, 2007. 
  17. ^ a b Jarrett, Jillian S. (2007-12-13). "Payday Lending Rules Tightened". The Washington Post. Retrieved 2008-01-20. 
  18. ^ Stewart, Nikita (2007-09-19). "Bill to Cap Payday Loan Interest Rates Passes". The Washington Post. Retrieved 2008-01-20. 
  19. ^ "Lawsuit Against Western Sky Financial". 2013. Retrieved 27 August 2014. 
  20. ^ Forbes.com: NM Governor Signs Payday Lenders Bill
  21. ^ North Carolina Department of Justice (2006). "Payday lending on the way out in NC" (PDF). Archived from the original on 21 March 2009. Retrieved 2006-03-22. 
  22. ^ North Carolina Declares Victory In War On Payday Lending
  23. ^ "Letter to lender from the Office of the Attorney General of the State of Arizona". Retrieved 2010-10-03. 
  24. ^ "Goddard: Payday Lender’s Departure Shows Repeal is Working". Retrieved 2010-10-03. 
  25. ^ "Providing Non-Bank Financial Services for the Underserved". 2014. Retrieved 27 August 2014. 
  26. ^ "http://www.nationalreview.com/article/371777/postal-service-banking-john-berlau". 2014. Retrieved 27 August 2014. 
  27. ^ "It’s Time for Postal Banking". 2014. Retrieved 27 August 2014. 
  28. ^ "Obama's Partly to Blame for the Postal Service's Backward Ways". 2014. Retrieved 27 August 2014. 

External links[edit]

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