President Barack Obama has said that he wants payday lending laws to become federalized rather than leaving important decisions, such as interest rate caps, up to each state. Until that happens, however, the laws between states will continue to vary wildly.
Some states have very strict laws that are diligently enforced. Other states have laws on the books, but they are not enforced. Other states have yet to enact legislation that limits interest rates to the point that many consumer groups feel is acceptable.
Below is information about some of the states that have the strictest payday lending laws on the books.
West Virginia
It seems that West Virginia lawmakers had the consumer’s best interest at heart when they passed payday lending legislation in 2006. With a tight cap in place on the interest rate that could be charged in the state, most lenders pulled out.
One, however, did not. First American Cash Advance continued offering loans as if it was business as usual. This happens in other states, but West Virginia lawmakers were serious about protecting their citizens and enforcing their laws.
The attorney general came down hard on the lender and in 2007 an agreement was reached that not only had First American Cash Advance leaving the state, but they also agreed to forgive over $600,000 in payday loans that were in default.
They also had to establish a small fund to refund money to customers who had paid interest after the 2006 laws went into effect.
Massachusetts
Massachusetts allows payday loans, but because the allowable interest rate is so low, most lenders have left the state. The maximum interest rate is 23%. While some states allow payday lenders to get around low interest rates by charging high fees, Massachusetts put a cap of $20 in fees per loan.
New York
New York is yet another state that wants payday lenders to know that they mean what they say. In 2005, when a lender shirked the law and made hundreds of loans to military families, the state not only shut them down, but voided all of the loans that had been made.
New Mexico
While New Mexico does allow payday lending, and does not have a very low cap on the APR, they do have some tough laws that protect consumers. First, borrowers can only have one loan at a time and they must wait 10 days after paying off one loan before they can borrow again. Also, borrowers are not allowed to extend their loans.
While loans of up to $2500 are allowed, lenders can only offer 25% of the borrower’s gross monthly income. This is a lower percentage that what is allowed in some other states.
Perhaps, the most consumer friendly part of the law in New Mexico relates to those having trouble paying the loan back. If you cannot pay the loan back, you are entitled to enter into a 130 day repayment plan. During this time, you cannot be charged interest or any fees.
Once the loan is paid back in full, you can take another loan after the ten day waiting period.
While some will not be happy until payday lending is banned completely, the laws in New Mexico work to protect the consumer from having more payday loan debt than income and by offering reasonable options for paying the loan back.
Kilmarnock, Virginia
While this article is about the states with the toughest laws, it seemed appropriate to mention this little Virginia town. Because the city council was not happy with the Virginia laws, they simply created their own city ordinances that banned payday lenders from operating within city limits.
Yes, residents of Kilmarnock can simply drive a few miles down the road to get a payday loan, but the city wanted its position about what they consider predatory lending to be very clear.
It is important to note that the laws in each state can change frequently. Some states that once banned payday lending now allow the practice.
If you would like to learn about payday lending laws in your state, visit www.paydayloanlegislation.com or similar sites that include highlights of payday lending legislation for each state.
If you think your state needs tougher laws, contact your congressmen.
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Payday lending legislation is a hot topic among some consumer groups. Some wonder why lawmakers continue to allow payday lenders employ practices that would be illegal for any other type of lender, such as banks or credit card companies. Others think the government should keep out of it and allow consumers to make their own financial decisions, whether those decisions are good or bad.
Below are the answers to some of the most commonly asked questions about payday legislation.
Payday Loans are Illegal in My State. Why Are These Loans Still Available?
This is not uncommon. Some states appear to have taken a very hard line when it comes to payday lenders. At least that is the way it looks on paper. Laws have been passed forbidding payday lenders from operating in the state, yet there are still countless retail payday lending locations throughout the state.
This is possible because, as with many other laws, the rules are simply not enforced. In theory, payday lenders who operate in states where it is illegal could cut their own throat. Since the loans are illegal, the contracts may not be enforceable.
But since it is highly unlikely that someone who is struggling financially to the point that they need a payday loan is going to spend the money to sue the lender, they feel safe. Written into the contract is an agreement that the borrower agrees not to participate in any class action lawsuits against the lender.
A class action lawsuit would be a more financially feasible way to bring a suit against a lender. Since the lender feels he is eliminating that option for the borrowers, he will likely continue making loans until someone steps in and shuts him down.
Are Payday Loan Laws Determined by the Federal or State Governments?
Currently, most of the important laws regarding payday lenders are made at the state level. Some states, such as New Hampshire, have very strict laws. For example, in New Hampshire, the highest interest rate that a payday lender can charge is 36%. Many lenders say that it is not possible with such a low interest rate cap.
President Obama, however, wants to toughen federal laws so that state laws will not allow payday lenders to continue to charge such high interest rates. He said it is his intention to place a cap of 36% on all payday lenders operating anywhere in the country.
How Can I Learn about Laws in My State?
Because the laws vary so widely from state to state, it would be difficult to list even the highlights in this article. The best way to learn about payday lending laws in your state is to do an internet search. For example, “Payday lending laws in Maine.”
One website, www.paydayloanlegislation.com, lists key points of laws for each state and the District of Columbia.
Keep in mind that the laws on the books can, at times, be misleading. As mentioned above, lenders continue to do business in states where it is illegal. Also, in some states with a cap on the interest rates, lenders simply add additional fees, keeping the cost of the loan the same as before the law came into effect.
How Can I Complain About a Lender?
The best way to lodge a complaint is with the state attorney general. When making a complaint, be specific about which laws you feel were violated. Any backup that you are prepared to provide, such as copies of voicemail messages, should be mentioned in the complaint.
If you think the laws in your state are too lax, write your congressman. In states where these lenders still operate, they give hundreds of thousands of dollars in campaign donations each year. They are working to keep the laws in their favor, so unless consumers step up and do their part to make sure the laws protect the public, it is not likely that significant changes will be made.
As mentioned above, some think the government should not try to protect consumers with such laws and that each person must be responsible for their own decisions. Still others feel these lenders employ abusive and predatory methods and must be stopped.
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Payday lending has been around in various forms for many years. Since that time, various lawmakers and consumer groups have worked to put restrictions on these lenders. The regulations are intended to protect consumers from what many consider to be abusive lending practices.
Some feel that not only are the interest rates far too high, but that the loans draw low-income borrowers into a cycle of borrowing again and again that is very difficult to break. Others feel that it is the consumer’s responsibility to make sure that they do not take on more debt than they can handle. Below are some of the most common regulations that consumer groups and lawmakers try to put on the payday lending industry.
Interest Caps
The most common complaint from lawmakers and consumer groups relates to the amount of interest that payday lenders charge. The fees amount to somewhere between 200% and more than 1300% APR, depending on the amount borrowed and the length of the loan.
While other types of lenders are not allowed to charge more than around 30% APR in most states, payday lenders charge much more. It is the short length of the loan that drives the actual APR up so high. A typical $500 loan will be assessed fees of around $75.
Legislation to cap the amount of interest to be equal to what other lenders are allowed to charge is usually on the table in one state or another at any given time. Once the law passes, if it is enforced, most payday lenders pull up stakes because they say that they cannot afford to do business where they can only charge $10 on a $500 loan.
Limits on Number of Loans
In 2008, a couple in Virginia had $4000 worth of payday loans. Their take home pay was just over $2500 total. How could a couple have thousands of dollars worth of payday loans in a state where the largest dollar amount of a loan was $500?
The answer is that in 2008, the state had very lax laws regarding the number of loans a borrower could have at one time. This husband and wife each had four payday loans of $500 each. They had simply visited several different lenders. The fees alone totaled $600 per month.
Obviously, getting out of that kind of debt would be nearly impossible. That is why, in 2009, lawmakers approved legislation that greatly limited the number of payday loans a borrower could have at one time. In Virginia, you can only have one loan at a time and you must wait one day before borrowing again.
Several states have such limits in place, and among the states that do not, many are considering such legislation.
Military Restrictions
Some states have enacted legislation that prohibits payday lenders from using aggressive collection tactics on military members who are deployed. In some cases, the loans must be placed on a hold status until the deployment is over.
Lenders in some states that have such restrictions on collecting loans from deployed military members have simply stopped offering loans to military members and their dependents.
Collection Practices
Collection practices vary between loan companies and from state to state. Some lenders have been known to call the borrower’s place of employment on a daily basis, leave threatening messages and contact the borrower’s boss over and over again. Some lawmakers called such practices abusive and banned them.
In some states, it is illegal for a payday lender to contact a borrower’s employer, except as a means of locating a borrower when other attempts have failed.
Even in states where there are laws prohibiting abusive and intimidating collection practices, some lenders do it anyway. If you are a victim of such practices, check the laws in your state and then contact officials if you feel the laws have been violated.
While payday lending legislation can go a long way to help control certain payday lending practices, it truly is up to the consumer to make sure that they use the loans responsibly and that laws that are on the books are being enforced.
Legislation can be a layer of protection for consumers, but it does not take the place of good judgment.
