In an attempt to clamp down on predatory lending practices, Delaware’s legislators passed regulations in 2012 that limited the number of payday loans that a borrower could take out in one year. However, Delaware payday cash loan lenders found creative ways to skirt regulations, and it was business as usual.
Delaware Payday Lenders Use Their Creativity to Evade Legislation
Public Citizen published an article confirming that regulation against payday lenders at the state level is largely ineffective. According to a recent report issued by the Democratic staff members of the House Financial Services Committee, consumers need stronger federal protections against the payday loan industry.
Throughout the nation, lenders of payday loans have used their ingenuity to sidestep state regulations. For instance, in Ohio, payday loan companies have begun registering as mortgage lenders because they are not subject to the restrictions that the state has in place for those who provide cash loans on a short-term basis.
In Colorado, companies that offer cash loans have started claiming tribal ownership. This has allowed them to avoid complying with the state’s laws that are in reference to the short-term loan industry. Payday loan lenders have also managed to evade laws in Texas by presenting themselves as a different type of loan provider that refers borrowers to an affiliated lender. To process a referral, they charge a fee, and this lets them bypass the state’s interest rate cap on personal loans.
In Delaware, lenders are switching from payday loans to installment loans. This borrowing option comes with longer repayment terms. In addition, it doesn’t require the consumer to make a balloon payment to pay off the loan.
When Lending is Based on Greed
Delaware Online reports that even with the state’s best efforts to put restrictions on the cash loan industry, thousands of Delaware residents are continuing to pay excessively high interest rates on their cash advance loans. These loans were taken out as a lifeline to avoid drowning during a desperate financial situation. Instead, they often leave people in a seemingly unending cycle of debt.
According to a report issued by the Consumer Financial Protection Bureau, or CFPB, an average payday loan borrower in the U.S. winds up paying on the loan for 200 days. This is more than half of a year. In addition, one out of every four borrowers spends 83 percent of their year in debt to the payday loan lender.
A Single Mother’s Experience with Installment Loans
After falling behind on her mortgage, Mary Tucker turned to a payday lender for help. The company that she contacted approved her for an installment loan. These cash advance loans are usually for higher dollar amounts than short-term loans, which is what she needed.
Tucker put the loan toward her mortgage, but it wasn’t quite enough to bring her mortgage out of its past due status, so she asked for a second installment loan. The company approved Tucker for $3,100. Under the loan terms, she had 47 months to repay it and an annual percentage rate, or APR, of 135 percent. If it took her the full 47 months to pay the money back, she’d wind up paying the company $16,500 in principal, interest and fees.
Trying to Close the Loophole
The Washington Times reports that after a payday loan lender demanded a repayment of $1,820 for a $200 loan, Delaware legislators decided to try to restrict the industry once again. In this case, the state introduced a bill that will cap the annual interest rate for payday and installment loans at 100 percent. According to the state’s data, the average APR for payday loans was 532 percent in 2015.
Financial reform advocates want even tougher restrictions on the industry. They say that the 100 percent interest rate cap is not restrictive enough and that a 36 percent rate would be more manageable for consumers. Lenders are fighting back because loan caps could put them out of business. Jamie Fulmer, Advance America’s senior vice president of public affairs, said, “Consumers lose any time the regulatory marketplace tries to impose arbitrary restrictions on them.”
Education is the Key
The short-term loan industry has proven its adeptness when it comes to finding ways around state regulations. Time will tell whether it will be able to do the same with federal ones. The CFPB is proposing rules for the industry that range from confirming that a consumer can repay the money that he or she borrows to establishing a cooling-off period between loans. However, the key to helping consumers is through education. If people learn how to avoid personal financial disasters, they won’t need short-term loans. To read more about how payday loan lenders dodge state regulations, visit the Personal Money Store.