2009 continues the trend of legislatures at both the federal and state level attempting to rein in what they see as an out-of-control industry – the payday lending industry. Pressured by consumer groups like ACORN, legislators across the country have introduced bills to either ban the payday lending industry entirely or to significantly increase substantive regulation. Congress is set to take up a major piece of legislation directly impacting the payday loan industry and more than a dozen states have bills pending to ban or significantly restrict payday lending. Here’s a snapshot of what’s going on in Congress and state legislatures across the country.
Congress held hearings on the Payday Loan Reform Act (HR 1214) in early April. HR 1214 imposes a 36% per year rate cap on payday loans of $2,000 or less. The bill would create a federal floor to which state legislatures can add additional state consumer protections. Additionally, HR 1214 eliminates rollovers by giving borrowers a three-month repayment plan with no additional fees or interest charges. The Payday Loan Reform Act also bans lenders from making more than one payday loan at a time to a consumer or accepting a payment plan payment from another payday loan. The industry is vigorously opposing HR 1214.
Two of the most active battleground states for payday lenders this legislative session are South Carolina and Washington. In South Carolina, the legislature had considered legislation to limit the amount a consumer could borrow based on the amount of the consumer’s income. South Carolina HB 3301 also established a seven-day waiting period between payday loans. However, the industry managed to strip the income limits out of the bill. The new bill also reduces the payday loan cooling-off period to two days, and allows a consumer to obtain an installment loan to pay off a payday loan balance. The bill prohibits the consumer receiving the installment loan from obtaining a new payday loan. Finally, the bill would establish a database to allow lenders to track a consumer’s eligibility for a payday loan. Similar measures to require a database currently are pending in Kentucky and Texas. It remains to be seen whether South Carolina will enact significant payday lending changes in 2009. The South Carolina Legislature is scheduled to adjourn June 4.
In Washington State, the “Fair Loan Act of 2009,” (HB 1709), appears headed for passage. The bill would limit the maximum amount that consumers could borrow at any one time to 30 percent of their monthly income or $700 and would also restrict the number of loans a person can take out during any calendar year to eight. Similar to South Carolina, the bill would also require payday lenders to offer a payment-plan option without additional fees to borrowers, giving them up to 90 days to pay debts up to $400, and 180 days for anything larger. During the term of an installment plan, consumers could not obtain another payday loan. Finally, like South Carolina, the Washington bill requires payday lenders to establish a statewide database to track all borrowers.
The industry should embrace some of the items in these bills. For example, the Community Financial Services Association (“CFSA”), a national trade association of payday lenders, has advocated that payday lenders adopt as a “best practice” extended payment plans for consumers unable to repay a payday advance according to their original contract.
Hawaii’s HB 447 would require payday lenders to conspicuously post all rates and fees and provide this information to each customer in writing. The bill would also require the payday lender to advise consumers that deferred deposit transactions are not suitable for long-term borrowing and to provide consumers with information on where to obtain financial education and credit counseling. The industry should embrace many of HB 447’s provisions, as the CFSA has as a “best practice” that payday lenders should make “rates clearly visible to customers before they enter into the transaction process.”
Idaho’s SB 1151 would make payday loans made in Idaho by unlicensed payday lenders void, uncollectible, and unenforceable, and would provide a private right of action for recovery of monies paid by borrowers to unlicensed payday lenders operating in Idaho. The Idaho measure targets, among other business operations, Internet payday lenders. The CFSA already takes the view that Internet payday lenders must obtain licenses in each state where the borrowers reside. Similarly, New York’s HB 1484 would prohibit foreign banking corporations from issuing payday loans, a measure aimed at stopping so-called “rent the charter” arrangements to allow payday lenders to avoid application of New York’s rate limitations.
Tennessee, Kentucky and New Mexico are considering measures to ratchet down the rates charged by payday lenders. Tennessee’s SB 1762/HB 2231 would limit the APR on payday loans to 28% per year, while Kentucky HR 217 would “urge” payday lenders to reduce the fees, charges, and interest on these loans from the current average of 400% to a maximum annual percentage rate of 36%, including all interest, fees, and charges. New Mexico’s SB 331 would cap loans of $2,500 or less to interest of 45% per year, effectively making payday lending unworkable in New Mexico. Minnesota, through HF 1147, would prohibit making a payday loan to a borrower to whom the same lender made one within the prior six months. It would also prohibit payday lenders from discouraging borrowers from accepting a conventional term loan or from discouraging borrowers from asking other lenders for such a loan.
Finally, Mississippi wins the prize for the most aggressively anti-payday lending legislation. Mississippi SB 2890 would “reiterate that in the State of Mississippi the practice of engaging in activities commonly referred to as payday lending … are currently illegal.” The bill also designates the location of a place of business where payday lending takes place in Mississippi as a public nuisance.
Cathy Brennan is a partner in the Maryland office of Hudson Cook, LLP. Basis Points readers can reach Cathy at 410-865-5405 or by email at cbrennan@hudco.com.