Utah Joins Growing Number of States Targeting the Payday Loan Industry
Utah residents are joining a number of states that are targeting the payday loan industry with new regulations. A recent report from the Utah Department of Financial Institutions suggested that the interest rates for payday loans recently dropped from a high of 482 percent to 459 percent according to a report posted at KUTV.com. Utah Representative Brad Daw has proposed legislation to prevent borrowers from getting new loans to pay off old debts. The KUTV report mentioned that an astonishing 43,500 loans remained unpaid after 10 weeks.
Washingtonpost.com reports that the Consumer Financial Protection Bureau, which was created by the Dodd-Frank Act, has sought to regulate payday lending at the federal level, but critics–which include incoming President Trump and House Financial Services Committee Chairman Rep. Jeb Hensarling (R-Tex.)–charge that the CFPB abuses its power, and legislators are seeking to curtail or abolish the agency.
Hensarling quoted Thomas Jefferson who likened federal power abuses to “swarms of officers to harass our people and to eat out their substance.” If the CFPB is abolished or curtailed, then consumer groups must rely on state laws to limit predatory lending and regulate the payday lending industry. Many analysts feel that abolishing payday lending completely would set a dangerous precedent and limit many families’ access to credit in emergencies.
More States Are Targeting Payday Loan Companies with New Regulations
There has been a backlash against payday lenders throughout the country, but industry critics haven’t been able to answer questions about what would replace the payday loan industry. Many people fear that loan sharking, unregulated Native American lenders and other predatory loan products–which are often just as damaging over longer term loan periods–could exacerbate consumers’ ability to repay their loans even more than high-interest, short-term loans.
Some states have banned payday lending completely while others take a hands-off view. Some states have merely tightened their rules to prevent the most egregious lending excesses. Short-term loan products remain popular enough with consumers that lending companies often find ways to get around state regulations. For example, companies often incorporate as mortgage lenders to avoid interest caps. In Virginia, payday lending is strictly regulated, but another Washingtonpost.com report suggested that lenders in Virginia began offering lines of credit to get around restrictive payday lending regulations.
In Utah, Wendy Gibson, spokesperson for the Utah Consumer Lending Association, suggested that the high interest rate average of short-term loans was misleading: “An annual percentage rate of 459.14 percent equates to a fee of $8.81 for a $100 loan for one week,” she said. “Payday loans give borrowers far better, less expensive options than overdrafts, returned check charges and utility disconnect/reconnect fees.” State law prohibits short-term payday lenders from charging interest on these types of loans for more than 10 weeks. Converting 10 weeks of interest into an annualized rate makes no sense in this situation.
Federal Curbs on Payday Loans Could Backfire by Subverting State Laws
Many states have already enacted regulations that cap interest rates for payday loans, but some analysts feel that new federal regulations of the payday lending industry could backfire. Crainsnewyork.com reports that New York State caps interest rates, which effectively puts payday lenders out of business because they can’t make a profit. New rules from the CFPB, however, puts pressure on New York to change its laws to comply with federal regulations. This would actually make payday loans viable in the state.
States like Missouri and Wisconsin don’t regulate payday lending, and the states have more payday loan companies than McDonald’s or Starbuck’s franchises. In New York, however, predatory lenders still operate with impunity by offering loans through tribal lenders and Internet-based loan companies.
Is Limiting Access the Best Way to Reduce Payday Lending?
Utah’s payday loan industry charges interest rates that are about twice as much as organized crime changed in the 1960s according to an Sltrib.com report. The Utah Department of Financial Institutions reported that the average payday loan in Utah is for $324 and earns interest for an average of 32 days. The state has 553 brick-and-mortar payday lending stores, which exceeds the number of Burger King operations, Wendy’s restaurants, Subway franchises and McDonald’s restaurants combined.
Limiting access to regulated, legal companies shifts consumer borrowing strategies to high-risk practices such as borrowing from organized crime or selling off treasured family mementos. People can also borrow from unregulated tribal lenders or pawn off valuable possessions. Many families shift their financial burdens to high-interest credit cards that can trap people in cycles of debt just as effectively as short-term loan products.
Pending State Legislation Includes a Variety of New Payday Loan Regulations
Utah is just one of the states that is considering new regulations of payday lending. NCSL.org reports that 38 states have laws that allow payday lending in some form while 11 jurisdictions ban payday lending or implement interest rate caps that curtail the industry. These jurisdictions include New York, New Jersey, Massachusetts, Connecticut, Pennsylvania, Vermont, Maryland, West Virginia, Guam, Puerto Rico and Virgin Islands. Arizona and North Carolina allow pre-existing statutes to sunset while Arkansas and the District of Columbia repealed their pre-existing statutes.
A few examples of some of the proposed and passed state laws from 2016 include the following regulations:
- Hawaii: Legislation was approved to give borrowers the right to rescind deferred deposits for installment loan plans.
- Illinois: H.R. 668 proposes that state Universities review their retirement plans to find out if any of the plan’s investments supports small-dollar lenders such as payday loan companies.
- Louisiana: S.B. 312 would prohibit lenders from contacting consumers by telephone for loan or tax refund solicitations regardless of whether the consumer is on the “National Do Not Call Registry.”
- Kentucky: Proposal S.B. 101 would establish an interest rate cap of 36 percent and prevent “unfair, false, misleading and deceptive practice in violation of the Consumer Protection Act.”
- Indiana: S.B. 99 would require all lenders to disclose how many days that median borrowers remain indebted in a given calendar year and how many loans are made by borrowers within seven days after paying off another short-term loan.
- Florida: S.B. 1524 died in committee. The proposal would have revised how much interest that deferred presentment providers, such as payday lenders, could charge.
- Delaware: Known for its easy process for incorporating a business and avoiding any state income tax, the state’s H.B. 446 proposal would limit alternative financial service companies to annual interest rates of 100 percent.
- California: California proposal S.B. 1290 would provide for licensing and investigating companies that arrange deferred deposit transactions. This includes payday lenders, auto title lenders and installment loan lenders. The law would provide investigator access to offices, places of business and records of lenders offering these products.
Regardless of politics, consumers face a blizzard of payday lending regulations, so it makes sense to keep informed about what’s happening in your state. If President Trump and the Republicans prevail, the CFPB will likely be abolished or have its power severely limited. That means state regulations will be increasingly important.