Legislative season is upon us, and, once again, state legislatures across the country have taken aim at their favorite alleged consumer foe – the payday lending industry. Despite a rough few years for the consumer financial services sector in general, the payday lending industry continued to flourish throughout 2009 and, in some areas, even expand. Although early last year saw initiatives at the federal level to curb payday lending, those efforts seem to have sputtered out, leaving the current battlegrounds for 2010 in the individual states.
Last spring, Congress held hearings on the Payday Loan Reform Act (H.R. 1214). H.R. 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, H.R. 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 H.R. 1214, and the bill is virtually dead in the House Committee on Financial Services.
A number of states have decided that 36 is indeed a magic number, and legislators in these states have introduced a slew of bills to cap the rates a licensed payday lender can impose on a payday loan to 36% per year. Those states include Montana (House Bill 396), Virginia (House Bill 187), Missouri (House Bill 2116), Colorado (House Bill 10-1351), New Hampshire (Senate Bill 193) and Kentucky (House Bill 516). Kentucky’s House Bill 516 would also make loans that violate the 36% cap an unfair, false, misleading, or deceptive act or practice in violation of the state’s unfair and deceptive acts and practices law. The bill would ban lenders from engaging in any deceptive practice to evade the requirements of the payday loan law, including assisting a customer in obtaining a deferred deposit transaction at a rate of interest that exceeds 36%, making deferred deposit transactions disguised as personal property sales or leaseback transactions, or disguising deferred deposit transaction proceeds as cash rebates under the pretext of an installment sale of goods or services. South Dakota also has floated a bill to cap interest rates, but Senate Bill 173 would allow payday lenders to impose 72% per year.
Two states have introduced emergency legislation to close loopholes in their state laws that have allowed payday lenders to operate under different licensing schemes that authorize higher rates of interest. South Carolina’s Senate Bill 1065 would ban lenders licensed as supervised lenders under the South Carolina Consumer Protection Code from making payday loans under that statute, which does not cap interest rates. The closing of this loophole would funnel payday lenders into the South Carolina deferred presentment provisions, which already limit the fee a licensed payday lender can impose on a payday loan to 15% of the principal amount of the transaction. Minnesota Senate Bill 2837 and House Bill 3170 would similarly prohibit payday lenders from obtaining a license as an industrial loan and thrift company.
Other states continue to tinker with their payday lending laws, shoring up the law at the edges of what they see as in need of improvement. Arizona House Bill 2161 would amend the state’s existing payday lending statute to prohibit a licensee from failing to take reasonable measures to ensure that no customer has more than one payday loan outstanding at any time with a licensed payday lender. HB 2161 would also limit renewals and require disclosures in English and Spanish. Finally, HB 2161 would ban payday loans to members of the military. Missouri House Bill 2116 would permit up to six renewals, but requires reductions of the principal amount of the loan by not less than five percent of the original amount of the loan until that loan is paid in full. A companion bill, Missouri House Bill 1936, also requires a licensed payday lender to conspicuously display in its lobby a brochure detailing the eligibility requirements for the Missouri food stamp program, a pointed reminder of the views held by some foes of the payday lending industry.
New Mexico Senate Bill 33 would limit interest for loans of $2,500 or less to 45% per year, while limiting loans that exceed $2,500 to 36% per year. The New Mexico legislation also would require the establishment of a database that payday lenders would have to consult before making a loan. The New Mexico database proposal – like most of the databases proposed, including Wisconsin’s under Senate Bill 530 – would create a database of payday loan borrowers similar to those already used in a number of states. Those databases, in use in a number of states, require payday lenders to input specific information about consumer so that all subscribing payday lenders can avoid making loans to ineligible consumers. Required information includes the consumer’s unique identifier, whether the loan is a new loan, a renewal of an existing loan or an extension of an existing loan, the amount of the loan, and the term of the loan.
Tennessee has entered into the payday loan debate with a raft of bills intended to rein in certain practices. Tennessee Senate Bill 3103 and House Bill 3112 prohibit payday lenders wherever located from making loans over the Internet, while Tennessee Senate Bill 3104 would limit the APR on the loans to 100%. Finally, Tennessee Senate Bill 3742 and House Bill 3306 would hamper purchases of licensed businesses by making payday lending licenses non-transferrable and imposing certain reporting requirements upon a change in control of a licensee.
The consumer-friendly state of Wisconsin has decided it needs to regulate payday lending, with legislators there introducing a pair of bills targeting the industry. Wisconsin Assembly Bill 447 would prohibit payday lenders from making a payday loan that exceeds the lesser of $600 or 35 percent of the borrower’s gross biweekly income, including both principal and interest. The measure does not, however, cap interest rates. In addition, AB 447 prohibits a payday loan provider from making a payday loan to an applicant who is liable for repayment on a payday loan made by another payday loan provider. Like other states such as Virginia (House Bill 188), AB 447 also bans “roll overs,” or refinancings, renewals, amendments, or extensions of a payday loan beyond its original maturity date.
Finally, Mississippi again wins the prize for the most aggressively anti-payday lending legislation. Senate Bill 3006 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. However, Mississippi payday lending foes introduced this bill year last year – and it failed.
Catherine 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.