Payday Lenders May Leave, But the Lending Lingers On

Consumer advocates and the payday lending industry agree on one thing – in fifteen states and the District of Columbia, usury caps have put payday loan companies out of business.

In fact, however, that’s not the end of the story.   As is too often the case, ingenious lenders and their attorneys have identified a loophole in the  complex web of state and federal laws and regulations that currently govern consumer lending.  Federally-chartered banks are exempt from  state usury caps, and some of them have gotten into the business of ultra-high-cost lending themselves, with APRs of up to 650%.   A recent factsheet from the National Consumer Law Center provides some of the grisly details.

How can this be?  Here’s an explanation: When loans are made to residents of one state by a bank based in another state, the interest rate limits that apply are those of the state where the bank is headquartered.   That’s why credit cards are almost all issued by banks located in South Dakota, Delaware, and Utah, places with little  regulation and no usury caps.   And that’s why refund anticipation loans, arranged by tax preparers like H&R Block but actually made by a handful of banks, can be made nationwide.

What’s different about payday lending is that the banks don’t make payday loans directly – or at least they didn’t until recently.   When North Carolina, for example, enacted a usury cap to prevent payday lending, the payday lenders there entered into “rent-a-charter” arrangements with out-of-state-banks, continued business as usual, and claimed that they were simply acting as “agents” of these banks.   Payday lending in North Carolina only ended when the federal bank regulators said that the banks couldn’t make loans through agents that they didn’t firmly control.   There was never a prohibition on banks themselves making ultra-high-cost loans.

What’s to be done?  The administration’s proposed Consumer Financial Protection Agency would bring uniformity, simplicity, and transparency to the regulation of consumer lending.  And a national usury cap would apply to all forms of consumer lending, by all types of lenders.