Many older Americans have
difficulty meeting their monthly expenses. Fixed incomes can't always cover
a senior's needs, particularly unexpected needs associated with medical problems,
home and car repairs, or even an old refrigerator that doesn't work anymore.
Unfortunately, there are few resources to help vulnerable seniors get through
these hard times. Affordable small loans are hard to come by. As a result, many
seniors end up with very high cost small loans, including payday loans.
What is a
payday loan?
Payday loans go by a variety
of names, including "deferred presentments", "cash advances", deferred deposits",
or "check loans", but they all work in the same way.
The customer writes a check
to the lender. The amount on the check equals the amount borrowed plus a fee
that is either a percentage of the full amount of the check or a flat dollar
amount. Some payday lenders will offer an alternative "automatic debit" agreement.
Customers who sign this agreement give the lender permission to automatically
debit the customer's account at a future date. These automatic debit arrangements,
in particular, are often marketed to public assistance recipients and Social
Security recipients.
The check (or debit agreement)
is then held for up to a month, usually until the customer's next payday or
until receipt of a government check.
The payday loan is for an
amount of cash that is less than the amount written on the check. At the end
of the agreed time period, the customer must either pay back the full amount
of the check (more than the amount of the loan), allow the check to be cashed,
or pay another fee to extend the loan.
Why are Payday
Loans Expensive?
The difference between the
amount of the check and the amount of cash the customer gets in return is interest
or a loan fee that the lender is charging. These types of short-term loans are
always very expensive.
For example:
The
High Cost of Payday Loans
You write a check dated in two weeks for.....................$256
You get back today......................................................
$200
Interest and charges.......................................................$
56
The interest rate for a loan of two weeks is.................... 730%
on an annual basis.
Compare this 730%
interest rate loan to annual interest rates as low as 10-15% that bank,
credit unions, and finance companies charge.
Abuses in
Payday Lending
Abuses in making and collecting
payday loans occur in a variety of ways. Cash-strapped customers are rarely
able to repay the entire loan when payday arrives, because they need the new
paycheck for current living expenses. Lenders encourage these customers to rollover
or refinance one payday loan with another; those who do so pay yet another round
of charges and fees and obtain no additional cash in return. If the check is
returned for insufficient funds or the loan otherwise goes unpaid, the lender
may threaten to involve the criminal justice system, a tactic that is possible
only because a check, rather than a mere promissory note, is involved.
Summary of Legal Claims
There are numerous legal claims
that can be used against payday lenders. These are summarized briefly below.
More information on these claims can be found in the National Consumer Law Center's
manual, The Cost of Credit: Regulation and Legal Challenges (2d ed. 2000 and
Supp.) and NCLC's handbook, Stop Predatory Lending: A Guide for Legal Advocates
(2002). For information on ordering NCLC publications, call (617) 542-9595 or
find out more on NCLC's web site, www.consumerlaw.org.
Possible Legal Claims Include:
Truth in Lending violations.1 Payday
lenders often fail to comply with the Truth-in-Lending disclosure requirements,
making it nearly impossible to understand the true cost of these loans. Payday
lenders often try to get around the law by claiming that they are not making
loans. They come up with schemes such as "sale-leaseback" transactions that
attempt to characterize the loan as something else. These disguises may be
challenged and courts will often that the transaction is really a loan
State Payday Lending Law violations. About half of the states and
the District of Columbia have passed industry-backed laws specifically authorizing
payday lending. These laws generally require either licensing or registration.
Some specify maximum loan terms and/or amounts.2
Usury. Most states have several different usury statutes, including
"special usury laws", such as small loan acts. Small loan laws are usually
structured as exceptions to a general usury ceiling. In about one-third of
the states, payday lenders must comply with state small loan and criminal
usury laws. Since these caps are substantially below payday industry charges
(the small loan limits are up to 36%), lenders in these states usually simply
ignore the small loan law or try to disguise the loan.3 Currently
six states permit payday lenders to operate and to charge any interest rate
or fees the borrower agrees to pay but, with the exception of South Dakota,
require them to comply with other small loan act provisions.4
Racketeer Influenced and Corrupt Organizations Act (RICO) claims.
The federal RICO law, 18 U.S.C. §§1961-1968 as well as state RICO laws should
be considered.5
State Unfair and Deceptive Acts and Practices (UDAP) claims. Overreaching
consumer credit transactions can often be challenged under state UDAP laws.
For example, disguising a small loan as check cashing or a sale-leaseback
constitutes a UDAP violation.6
Fair Debt Collection Laws. Illegal or deceptive debt collection
threats, such as threats to arrest borrowers, may violate federal or state
fair debt laws.7
Common Law Claims including breach of fidicuriay duty, fraud,
or negligence should also be considered.
Licensing Violations. Licensing laws and penalties exist in
many states. The laws are discussed in NCLC's manual, The Cost of Credit:
Regulation and Legal Challenges (2d ed. 2000 and Supp.).
Alternative Sources of Credit
Many seniors understand the high cost of payday loans, but may not know where
else to turn. Creating affordable lending alternatives should be a top advocacy
priority so that these consumers can say no to the payday lenders and still
find reasonably priced loan products.
Consumer education is important, but unlikely to be effective when there are
few (or no) alternatives available. For this reason, it is critical for advocates
to learn more about affordable sources of credit in their communities and to
help direct clients to these resources. Credit unions, including may community
development institutions, often offer small loans at reasonable rates. More
information about community development credit unions is available from the
Coalition of Community Development Financial Institutions, 215-923-5363, http://www.cdfi.org/ and the National Federation
of Community Development Credit Unions, 212-809-1850, http://www.natfed.org/.
For More Information
The National Consumer Law
Center publishes a manual The Cost of Credit: Regulation and Legal Challenges
(2d ed. 2000 and Supp.), as well as a handbook, Stop Predatory Lending: A Guide
for Legal Advocates (2002). For more information, contact NCLC Publications
at (617) 542-9595 or check out NCLC's web site, www.consumerlaw.org.
Useful Publications
About Payday Lending
Jean Ann Fox and Edmund Mierzwinski,
"Rent-A-Bank Payday Lending: How Banks Help Payday Lenders Evade State Consumer
Protections", Consumer Federation of America and U.S. PIRG (November 2001).
Available at www.consumerfed.org.
Elizabeth Renuart and Jean
Ann Fox, "Payday Loans: A High Cost for a Small Loan in Low-Income and Working
Communities", 34 Clearinghouse Review 589 (Jan./Feb. 2001).
Marva Williams and Kathryn
Smolik, "Affordable Alternatives to Payday Loans", Woodstock Institute Reinvestment
Alert No. 16 (March 2001). Available at www.woodstockinst.org.
1 15
U.S.C. §§1601 et seq. See generally National Consumer Law Center, Truth in Lending
(4th ed. 1999 and Supp.).
2 The
list of states with payday loan laws continues to grow. To keep up to date,
see NCLC's manual The Cost of Credit: Regulation and Legal Challenges (2d ed.
2000 and Supp.) and/or the payday loan section of NCLC's web site, www.consumerlaw.org.
3 In
some cases, state usury limits may be preempted by federal law. Payday lenders
may also attempt to avoid state law by partnering with national banks. Preemption
is a complex area of the law. For a detailed explanation, see National Consumer
Law Center, The Cost of Credit (2d ed. 2000 and Supp.).
4 As
of 2002, these states are Delaware; Idaho; New Hampshire; New Mexico; South
Dakota (small loan act repealed); Wisconsin. This list may change particularly
if these states pass payday loan legislation.
5 See
generally National Consumer Law Center, Unfair and Deceptive Acts and Practices
§9.3 (5th ed. 2001 and Supp.); National Consumer Law Center: The Cost of Credit:
Regulation and Legal Challenges §11.6 (2d ed. 2000 and Supp.).
6 See
generally National Consumer Law Center, Unfair and Deceptive Acts and Practices
(5th ed. 2001 and Supp.).
7 See
generally National Consumer Law Center, Fair Debt Collection (4th ed. 2000 and
Supp.).
This publication was supported, in part, by a grant #90AP2483
from the Administration on Aging, Department of Health and Human Services, Washington,
D.C. 20201. Grantees undertaking projects under government sponsorship are encouraged
to express freely their findings and conclusions. Points of views or opinions
do not, therefore, necessarily represent official Administration on Aging policy.
and NCLC