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Payday Loans Laws
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We often come across enticing ads such as "EeeZee Payday Cash..." ｡ｧCash at your doorstep on the same day..｡ｨ etc. on the FM, TV, Net, and in our mailboxes. Are the numerous payday loan companies that promise cash advance loans, check advance loans, or deferred deposit check loans, really a viable option to the consumer? What are the laws related to this flourishing industry in the United States? This article aims to answer these questions. Payday loans Laws Usually, payday loans are two to four weeks loans. Let us take a typical example of how payday loans work. A person borrows $400 from a payday loan company at which time, he would also write a personal check to the lender for $360, including the borrowed amount $400 and a $60 fee. On the following payday, the person either redeems the check by paying the $360 in cash, or lets the payday loan company to withdraw the amount, by using the personal check. If the person｡ｦs bank savings is less than $360, the borrower may face legal action, for the bounced check. Usually it is difficult to raise $60 within the two weeks period to clear the loan and so, the person gets it renewed for another term. This gets repeated. In the above example, the interest of $60 is the equivalent of $1,170 for a year, or 390 % Annual Percent Rate. Though this amount is higher than the APR announced for house loans etc., it doesn｡ｦt require collaterals, real estate to mortgage or some other security. This is one reason that makes payday loans seemingly easy.
In a report ｡ｧQuantifying the Economic Cost of Predatory Payday Lending｡ｨ, published December 18, 2003 [and revised February 24, 2004], The Center for Responsible Lending, says that payday loan companies force borrowers to keep renewing their loans. It says, ｡ｧThis cycle (the ｡ｧdebt trap｡ｨ) locks borrowers into revolving, high-priced short-term credit instead of meeting the need for reasonably priced, longer-term credit｡ｨ. A 2005 CRL Fact sheet says, ｡ｧResearch shows that payday lending, also known as cash advance or deferred deposit, fails to help families solve their financial crises. There are many more payday borrowers trapped in loans than there are occasional users｡Xninety-nine percent (99%) of payday loans go to repeat borrowers. Instead of benefiting borrowers, payday loans trap them in high-cost debt.｡ｨ Laws related to payday loans laws Payday lending is legal in the majority of states in the United States. Several national payday companies partner with out-of state banks to get around the law by opening ｡ｧrent-a-bank｡ｨ shops. To quote an example, payday lending is legal in Texas, and the state has the highest number of rent-a-bank shops in the country. These shops collect fees in excess of the triple-digit interest rate limit in Texas. Three federal regulatory organizations, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Reserve Board have come up with action to prevent financial institutions from partnering with payday lenders. The Federal Deposits Insurance Corporation is an exception in that it still tolerates the rent-a-bank arrangement. In Georgia and in Maryland, legislation has been enacted to prevent ｡ｧrent-a-bank｡ｨ arrangement and ban predatory payday loans laws lending practices. Georgia｡ｦs payday lending law The Georgia Act prescribes harsh penalties for lenders who make loans of $3,000 or less in violation of Georgia's existing lending and consumer protection laws. The Bill, signed by Governor Perdue in April 2004, caps small consumer loans at 60 percent per year and explicitly prohibits all non-bank lenders from partnering with out-of-state banks in order to avoid Georgia's usury limit. A few of the penalties for payday lending according to the Georgia Bill SB 157, Criminal Code Title 16, Chapter 17, are as follows: Civil penalties: 1. Borrowers are authorized to sue for three times the amount of all interest and charges, plus attorneys｡ｦ fees and court costs. Class actions are specifically authorized. [16-17-3] 2. ハハDistrict attorneys and the Attorney General are also authorized to bring a civil action on behalf of the State seeking three times the amount of all interest and other charges. District attorneys may keep half of any recovery for their office budget. [16-17-4] 3. ハハIllegal payday loans are declared void, and lenders are barred from collecting the indebtedness. [16-17-3] 4. ハハPayday loan offices are declared a public nuisance. [16-17-8] 5. ハハA tax equal to 50% of all proceeds received from illegal payday loans is imposed. [16-17-5] 6. ハハPayday lenders are barred from obtaining certificates of authority to do business in Georgia from the Secretary of State and the Department of Banking and Finance. Payday lenders with existing certificates will face revocation. [16-17-7] Criminal penalties: 1. ハハPayday lending is a misdemeanor of a ｡ｧhigh and aggravated nature.｡ｨ Punishment for the first three offenses is maximum 1 year in jail and up to $5000 fine per violation. For the fourth and all subsequent violations, the crime is declared a felony, and punishment is up to 5 years in jail and up to $10,000 fine. [16-17- 2(d)] 2. ハハLenders engaged in a pattern of illegal payday lending may be liable for ｡ｧracketeering｡ｨ under the Georgia RICO laws. [16-14-3(9)(a)(xxxiii)] Existing RICO laws authorize felony prosecution with punishment of 5-20 years in jail, and a fine of either $25,000 or three times the amounts illegally gained. [16-14-5] 3. RICO also authorizes forfeiture proceedings in appropriate cases [16-14-7], and a civil remedy for victims of three times actual damages and punitive damages where appropriate. The State of Maryland also did something similar by amending its Credit Services Act to ban the brokering of unsecured closed-end loans in violation of its 33% APR cap on small loans. CRL POLICY RECOMMENDATIONS The Center for Responsible Lending has come up with alternative proposal of emergency loan products with minimum loan term of 90 days with option to repay in installments with no prepayment penalty. It also suggests that lenders should consider the borrowers｡ｦ ability to repay the loan and that they should stop using personal check or electronic equivalent. So, while there is much more to be done in the legislative action, thanks to CRL and many other lobbyists, there are many viable alternatives to the consumer.
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