Payday loans in the United States
Payday loans in the United States are no longer a growing industry, as the number of storefronts have declined in recent years. Regulation of payday 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 to provide maximum choice in the marketplace, while opponents of the industry lobby to prohibit the high cost loans in order to protect consumers from predatory lending.
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 limits: hard interest rate caps calculated strictly by annual percentage 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.
A consumer enters a store and fills out an application, providing basic identifying information. The consumer must also be employed and have a bank account. The consumer will leave a post-dated check in the amount of the principal borrowed plus the fee. Most lenders will call and remind the consumer that their loan is due the day before the maturity date.
A consumer has the option of returning to the store to repay the loan and fee in cash, and receive the post-dated check back, or phone the lender and instruct the lender to deposit the check. If the check is deposited and clears, the loan is considered closed.
If the account is short on funds to cover the check, the borrower may face a bounced check fee from their bank 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, some states permit the loan to be renewed in exchange for paying the 15% fee. Some states do not permit renewals. Members of the Community Financial Services of America are required to offer an extended payment plan at no additional cost after four renewals or whatever state law requires.
In Washington and some other states, extended payment plans are required by state law.
In states where payday loans are illegal or face interest caps banks may partner with payday lenders in other jurisdictions by processing electronic billing requests from the lender asking for withdrawals from the borrower's local bank account. The automatic withdrawals, which may result in overdrafts and substantial overdraft fees, are agreed to by the borrower in the loan contract. As of 2013 this was legal in states such as New York as the loan was not made in New York, but via online websites, other states, or even other countries.
The following states have made payday loans illegal:
- Massachusetts (not strictly illegal but highly regulated, interest rate capped at 23%)
- New Jersey
- New York
- North Carolina
- West Virginia
In order for payday lending to be legal, enabling legislation has been passed in many states that permit usury exemptions for this product.
State laws in the United States generally preclude charging of fees other than those expressly permitted by law.
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, 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. 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.
The Dodd–Frank Wall Street Reform and Consumer Protection Act gave the Consumer Financial Protection Bureau 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.
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.
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 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.
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- The John Warner National Defense Authorization Act - Talent Amendment
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