Today's Trends in Credit Regulation

2011 Payday Lending Legislative Developments
By Catherine M. Brennan

The Payday Lending Industry has thus far proved itself to have much in common with the Energizer Bunny – that is, it takes a lickin’ – with consumer advocates, politicians and the press – and it keeps on tickin’. The past year has signaled strong continuing interest in payday lending at both the federal and state levels, particularly as the economy emerges from the recession that has gripped the country for the last few years.

At the federal level, the most significant development vis-à-vis payday lending over the last year was the Dodd-Frank Wall Street Reform and Consumer Protection Act. Dodd-Frank authorized the newly formed Bureau of Consumer Financial Protection to declare an act or practice “abusive” in connection with the provision of a loan if the act or practice materially interferes with the ability of a consumer to understand a term or condition of a loan, or takes unreasonable advantage of a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the loan, the inability of the consumer to protect his or her interests in selecting or using a loan, or the reasonable reliance by the consumer on a lender to act in the interests of the consumer. Payday lenders anticipate that their product will fall squarely within some part of this standard, and thus have braced for these efforts.

At the state level, legislatures continue to embrace a 36% per year cap on finance charges. Legislators in a number of states have introduced a raft of bills to cap the rates a licensed payday lender can impose on a payday loan to 36% per year, including Kentucky House Bill 182 and Iowa Senate File 113. The Virginia General Assembly has already killed the proposed 36% cap on payday loans there. Indiana has a bill – House Bill 1410 – that would require a payday lender to display at its business and on loan documents a toll-free telephone number consumers can call to receive information about credit counseling services.

At least one state is significantly tinkering with its existing law. Mississippi has a payday lending law subject to a sunset provision, which would mean the end of the business. Mississippi House Bill 455, which has already cleared the Mississippi House of Representatives, would extend the life of the payday lending industry in Mississippi another 2.5 years while lowering the interest rates allowed under current law. HB 455 caps fees at $20 for every $100 cash received for checks written up to $250. For loans on checks that exceed $250, the legislation caps the fee at $21.95 per $100 cash received. Consumers who take out the larger loans would have at least 28 to 30 days to pay it back. The bill also increases the amount payday lenders could write checks for loans. The cap would move from $400 to $500, but that $500 would include the fee. Stretching out the repayment period would lower the equivalent interest rate. Payday lenders also must provide customers with a pamphlet spelling out terms of the payday lending law and listing a hotline to the attorney general’s office and the Mississippi Department of Banking and Consumer Finance to report problems. In contrast, Mississippi Senate Bill 2666 would ban payday lending altogether.

Interestingly, two states – Washington and New Hampshire – are looking to repeal certain consumer protections for payday loan borrowers. Washington State’s House Bill 1678 would repeal current state law limiting consumers to eight payday loans in a 12-month period. The bill’s lead sponsor has claimed in news reports that he proposed the repeal bill to address concerns about consumers who now rely on unlicensed lenders operating on the Internet. New Hampshire’s Senate Bill 57 would repeal the 36% rate cap the legislature adopted in 2008, under the rationale that the cap has eliminated credit for New Hampshire consumers. Missouri, apparently not heeding the Washington State arguments, is considering House Bill 132, which would prohibit repeated renewals on payday loans, among other things.

Probably the most-watched consumer protection development is in Texas, which may close a perceived loophole that has allowed payday lenders to operate virtually unfettered. Texas House Bill 410 and Senate Bill 253 aim to stop payday lenders from operating as a credit service organization, which requires only a $100 annual registration fee and imposes no limitations on the fee the credit service organization can charge. The credit services organization model of lending allows Texas payday lenders to avoid Texas’ maximum usury rates. Under this model, a separate lending company originates a loan at an interest rate of 10% or less to avoid Texas lending licensing requirements. A second company – the credit services organization – “brokers” the loan on behalf of the and charges a broker fee, which is not subject to the state cap that would trigger licensing, for brokering the loan. The legislature has considered similar legislation in the past, and it remains to be seen whether consumer advocates will prevail this session.

Finally, winning the award for the best way to avoid a debate on payday lending, Oklahoma is considering House Bill 1198, which would create a “Task Force on Payday Lenders and Rental Purchase Lessors” and direct the Task Force to review the Deferred Deposit Lending Act and payday lending and rental purchase laws in other states and to consider the topic of requiring payday lenders to comply with the interest caps on consumer loans.

Catherine M. Brennan is a partner in the Maryland office of Hudson Cook, LLP. Catherine can be reached at 410-865-5405 or by email at

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