CFED Assets & Opportunity Scorecard
Protections from Predatory Short-Term Loans
Predatory lending strips wealth from financially vulnerable families and leaves them with fewer resources to devote to building assets and climbing the economic ladder. Three of the most prolific and wealth-stripping short-term loan products are payday loans, car-title loans and abusive installment loans. Lenders of these products often charge exorbitant fees and interest rates, lend without regard to borrowers’ ability to repay, continually refinance loans over a short period of time, and commit outright fraud and deception. States have the power to regulate predatory short-term lending by prohibiting predatory loans, capping them at 36% APR, and strengthening state Unfair and Deceptive Acts and Practices (UDAP) statutes.
CFED evaluated the strength of each state’s policies that protect consumers from predatory short-term lending against the four criteria described in the Elements of a Strong Policy tab. The table below shows which criteria each state met.
CFED uses the following icons to denote the strength of state policies:
Strength of State Policies: Protections from Predatory Short-Term Loans
|State||Does state protect against payday lending? 1||Does state protect against car-title lending? 1||Does state protect against short-term installment loans? 1||Do state UDAP statutes cover short-term consumer loans? 2||Rating|
|Alabama||No (456%)||No (300%)||No (94%)||Yes|
|Alaska||No (443%)||Yes (Prohibited)||Yes (36%)||Yes|
|Arizona||Yes (36%)||No (204%)||No (54%)||Yes|
|Arkansas||Yes (17%)||Yes (Prohibited)||Yes (17%)||Yes|
|California||No (460%)||Yes (Prohibited)||No (45%)||Yes|
|Colorado||Yes (Prohibited) 3||Yes (Prohibited)||No (91%)||Yes|
|Connecticut||Yes (30%)||Yes (Prohibited)||Yes (29%)||Yes|
|Delaware 4||No (No cap)||No (No cap)||No (No cap)||Yes|
|District of Columbia||Yes (24%)||Yes (Prohibited)||Yes (24%)||Yes|
|Florida||No (342%)||Yes (30%)||Yes (30%)||Yes|
|Georgia||Yes (Prohibited)||No (304%)||No (44%)||No|
|Hawaii||No (460%)||Yes (Prohibited)||Yes (24%)||Yes|
|Idaho||No (No cap)||No (No cap)||No (No cap)||Yes|
|Illinois||No (404%)||No (No cap)||No (99%)||Yes|
|Indiana||No (391%)||Yes (Prohibited)||Yes (36%)||Yes|
|Iowa||No (358%)||Yes (35%)||Yes (36%)||Yes|
|Kansas||No (391%)||No (No cap)||Yes (36%)||Yes|
|Kentucky||No (471%)||Yes (36%)||No (42%)||Yes|
|Louisiana||No (574%)||Yes (Prohibited)||No (81%)||No|
|Maine||Yes (30%)||Yes (Prohibited)||Yes (30%)||Yes|
|Maryland||Yes (33%)||Yes (Prohibited)||Yes (33%)||Yes|
|Massachusetts||Yes (23%)||Yes (Prohibited)||No (37%)||Yes|
|Michigan||No (375%)||Yes (Prohibited)||No (43%)||No|
|Minnesota||No (235%)||No (116%)||No (51%)||Yes|
|Mississippi||No (572%)||No (300%)||No (52%)||No|
|Missouri 5||No (1955%)||No (No cap)||No (No cap)||No|
|Montana||Yes (36%)||Yes (36%)||Yes (36%)||Yes|
|Nebraska||No (460%)||Yes (Prohibited)||No (47%)||No|
|Nevada||No (No cap)||No (No cap)||No (40%)||Yes|
|New Hampshire||Yes (36%)||No (300%)||Yes (36%)||No|
|New Jersey||Yes (30%)||Yes (Prohibited)||Yes (30%)||Yes|
|New Mexico||No (409%)||No (No cap)||No (No cap)||Yes|
|New York||Yes (25%)||Yes (Prohibited)||Yes (25%)||Yes|
|North Carolina||Yes (36%)||Yes (Prohibited)||No (54%)||Yes|
|North Dakota||No (520%)||Yes (Prohibited)||Yes (28%)||Yes|
|Ohio||Yes (28%) 6||Yes (Prohibited) 7||No (70%)||Yes|
|Oklahoma||No (396%)||Yes (Prohibited)||No (46%)||Yes|
|Oregon||Yes (36%) 8||No (154%)||Yes (36%)||Yes|
|Pennsylvania||Yes (24%)||Yes (Prohibited)||Yes (26%)||Yes|
|Rhode Island||No (261%)||Yes (Prohibited)||Yes (30%)||No|
|South Carolina||No (391%)||No (117%)||No (71%)||Yes|
|South Dakota||No (No cap)||No (No cap)||No (No cap)||Yes|
|Tennessee||No (313%)||No (264%)||No (87%)||No|
|Texas||No (No cap)||No (No cap)||No (84%)||No|
|Utah||No (No cap)||No (No cap)||No (No cap)||No|
|Vermont||Yes (18%)||Yes (Prohibited)||Yes (24%)||Yes|
|Virginia||No (610%)||Yes (Prohibited) 9||Yes (36%)||No|
|Washington||No (390%) 10||Yes (Prohibited)||No (39%)||Yes|
|West Virginia||Yes (31%)||Yes (Prohibited)||No (38%)||No|
|Wisconsin||No (No cap)||No (No cap) 11||No (No cap)||No|
|Wyoming||No (313%)||Yes (Prohibited)||Yes (36%)||Yes|
1. Leah Plunckett and Ana Hurtado, "Small-Dollar Loans, Big Problems: How States Protect Consumer from Abuses and How the Federal Government Can Help," Suffolk University Law Review, Vol. XLIV (2011):31. Additional updates for 2012 provided by Uriah King at the Center for Responsible Lending. Payday loan maximum APR caps are based on a $250, two-week payday loan. Car-title loan maximum APR caps are based on a $300, one-month auto-title loan. Small dollar installment loan maximum APR caps are based on a $500, six-month installment loan.
2. Data based on a state-by-state analysis of UDAP statutes and past court decisions from Carolyn Carter at National Consumer Law Center.
3. Two-week payday loans are effectively prohibited in Colorado; however, the APR for a $250, six-month, lump sum repayment payday loan (the minimum length permitted by law) is 145%.
4. Delaware enacted legislation in 2012 limiting the number of short-term loans a consumer may borrow in a 12-month period to five. The law also expands the definition of short-term consumer loans to include all loans under $1,000 and creates a database that tracks the number of short-term loans consumers obtain.
5. In 2012, Missourians for Responsible Lending submitted 180,000 signatures to the Secretary of State for a ballot initiative that would cap payday loans at 36% APR. Following a series of legal battles between consumer advocates and the payday lending industry, the issue did not make it on the November ballot.
6. Although Ohio has a 28% annual interest rate cap for payday loans, many payday lenders in the state have stayed in business through a loophole: using licenses issued under the state's small loan and mortgage loan acts. Measures are being taken to address this problem, including efforts by the Ohio Department of Commerce to revoke several lenders' licenses and proposed legislation that aims to close this loophole.
7. Although auto-title lending is not authorized under Ohio law, some auto-title lenders are operating under statutes not intended to regulate their practices and may be operating illegally.
8. While Oregon successfully lowered its rate cap to 36% APR, lenders may still charge initial loan fees of $10 per $100 borrowed, up to $30 -- higher than in any other state with a rate cap. As a next step, Oregon should further strengthen its payday lending policy by closing this loophole.
9. The title loan product evaluated by the Scorecard is prohibited in Virginia as of October 1, 2010. However, title lending at triple digit APRs is still permitted for other title loan products in this state.
10. Washington limits borrowers to eight payday loans in any 12-month period. This has substantially decreased payday loan volume and the number of lenders in the state. For more information, see "2010 Payday Lending Report," Department of Financial Institutions, 2010
11. In 2010, Wisconsin Governor Jim Doyle partially vetoed an industry-friendly payday and car-title bill. The Wisconsin Governor's unique line-item veto powers allow for the deletion of individual provisions or even words of a bill. Governor Doyle's partial veto effectively capped interest rates at 18% annually. However, in 2011 the Joint Budget Committee attached what was effectively a repeal of the 2010 legislation limiting car-title loans in the Wisconsin's omnibus budget bill and was ultimately passed by both legislative chambers and signed by the new Wisconsin Governor.
WHAT STATES CAN DO
Many states have already recognized the negative impact of predatory small dollar lending. The majority of states regulate these practices in some way, although laws offer varying degrees of protection.
While there are a number of strategies to curb payday and car-title lending, by far the most effective is to prohibit these loans outright or to establish a fair playing field by imposing an APR cap of 36%. Research suggests that state efforts to address high-cost payday lending without such rate caps have been largely unsuccessful.1
Unlike most payday and car-title loans, small dollar installment loans – when responsibly regulated – can be a safe product. Therefore, rather than prohibiting them altogether, the best policy is to cap these loans at 36% APR. The FDIC recently found that small dollar lenders can safely and profitably lend to consumers at an APR of 36% or less.2
In addition to prohibiting or capping predatory short-term loan products, states can strengthen their Unfair and Deceptive Acts and Practices (UDAP) statutes to ensure that they cover predatory short-term lending. State UDAP laws protect consumers from a range of predatory, deceptive and unscrupulous business practices. These laws offer basic justice to consumers if they are cheated or deceived by a lender. Essentially, UDAP statutes help ensure that these lenders are honest, transparent and accountable in their day-to-day operations. However, some states’ statutes do not cover small dollar credit transactions; they either exempt most lenders and creditors or have significant gaps or ambiguities. States should close loopholes and ensure that all small dollar credit transactions, particularly payday and car-title lending, are covered under UDAP statutes.3
WHAT STATES HAVE DONE
Ten states have prohibited or capped all three types of predatory loan products and include short-term lending in basic consumer protection laws. Fifteen states do not effectively regulate any of the three predatory loan products, although nine of these states include short-term lending in basic consumer protection laws. All other states protect consumers against some, but not all, predatory short-term loan products.
1 Uriah King and Leslie Parrish, Springing the Debt Trap: Rate Caps are Only Proven Payday Lending Reform, (Durham, NC: Center for Responsible Lending, 2007).
3 For more information about state UDAP laws, see: Carolyn Carter, Consumer Protection in the states: A 50-State Report on Unfair and Deceptive Acts and Practices Statutes, (Boston, MA: National Consumer Law Center, 2009).
ELEMENTS OF A STRONG POLICY
Based on the Center for Responsible Lending’s and National Consumer Law Center’s expertise and work in the field of responsible lending policy, CFED considers a state’s predatory small-dollar lending policies strong if they meet the following criteria:
1. Does the state protect consumers from payday lending? States should protect consumers by prohibiting payday lending altogether or imposing an APR cap of 36% or less.
2. Does the state protect consumers from car-title lending? State should protect consumers by prohibiting car-title lending altogether or imposing an APR cap of 36% or less.1
3. Does the state protect consumers from predatory short-term installment loans? States should impose an APR cap of 36% or less on $500, 6-month unsecured installment loans.2
4. Does the state include short-term lending in basic consumer protection laws? States should ensure that their Unfair and Deceptive Acts and Practices statutes cover predatory short-term lending.
To see how each state’s policy stacks up against these criteria, see the State Data tab above.
2 CFED examines the $500, 6-month loans because most states have tiered pricing systems for small dollar installment loans that vary by the size of the loans.
MAKING THE CASE
Key Elements for a Successful Campaign
1. Build a coalition. As with all policy campaigns, strength in numbers is key. Seek out other advocates and coalitions likely to know about and support lending reform. Think creatively about potential partners to approach; while it is important to secure the support of the “usual suspects” already engaged in similar work, you should also consider reaching out to less traditional allies in the public, private and nonprofit sectors.
2. Understand the opposition. Advocates for lending reform usually face substantial opposition from powerful, vocal and well-resourced industry players, such as trade associations. The importance of anticipating and preparing for this opposition cannot be underestimated. It is, however, also important to keep the lines of communication open between industry and advocates, as you will likely be in intensive negotiations with your industry counterparts throughout the legislative process.
3. Do the research. In order to make a compelling argument for lending reform, it will be essential to document the extent of the problem in your state as completely as you can, using the most reliable data possible. While anecdotal evidence can be a powerful tool to illustrate the impact of predatory lending on consumers, it is no substitute for quantitative data. Some states require requires lenders and brokers to report individual-level consumer loan data to state enforcement agencies.
Where possible, explain not only the prevalence of the problem (e.g., the number of consumers taking out predatory loans) but also the associated cost (e.g., the difference in payments for a consumer with a predatory loan compared to a more reasonably priced loan product).
An excellent resource on state-by-state small dollar predatory lending data, including the costs of payday lending to consumers, is available through the Center for Responsible Lending.1
4. Enlist the experts – and become one yourself. Predatory small dollar lending is complicated, and advocates who engage in lending reform efforts often find that extensive technical expertise is required in a number of areas, including banking and lending, consumer protection, and general matters of law. If you are not a subject matter expert in these areas, it will be critical to seek out allies with strong experience who can assist you in navigating the complexities of the issues. This is particularly important as legislation is being crafted. Where predatory lending is concerned, the devil is in the details, and a seemingly minor nuance in the construction of legislative language can result in a major unintended loophole for predatory lenders if it is not caught and remedied. Having the right advisory team in place (and ensuring that key advocates understand the technical details) will help states develop stronger legislation and negotiate more effectively.
5. Balance internal and external strategies. Every campaign needs a basic external strategy to elevate the cause, build public awareness and support, and gain visibility. However, in lending reform efforts, the internal strategy is even more important: working closely with allies and opponents to negotiate key elements of the legislation and secure support from key decision-makers. Most of your time will probably be spent on these “inside” interactions.
6. Secure early political support. Early on, seek strong legislative champions for your lending reform efforts. Since lending reform can be both complex and controversial, legislators will need to be prepared to educate themselves on the many details of the issues, and to stand up to opposition when needed. Seek support from key policymakers on both sides of the aisle, and be sure to document the extent of the predatory lending problem in their home districts as extensively as possible.
7. Engage the media. Many states’ campaigns have enjoyed success in attracting media attention to lending reform efforts. Work closely with targeted media (e.g., in key districts, or in outlets with extensive reach and/or clout) to generate editorial and news articles in support of anti-predatory lending legislation.
8. Tell compelling stories. While accounts of individual borrowers who have suffered from abusive small dollar loans are no replacement for hard data, they can “humanize” the issue for legislators and the public. One excellent way of energizing and attracting attention to your campaign is to tell the stories of individuals and families (in their own words, where possible) who have been victimized by predatory lenders. It is particularly powerful to share stories from a legislator’s home district.
1 Uriah King, Leslie Parrish and Ozlem Tanik, Financial Quicksand: Payday lending sinks borrowers in debt with $4.2 billion in predatory fees every year, (Durham, NC: Center for Responsible Lending, 2006).
For each edition of the Assets & Opportunity Scorecard since 2007, CFED has worked with experts in the field to capture detailed stories of noteworthy state policy changes—both policy victories and instructive defeats. These case studies appear in the Resource Guides for each policy priority.
A Successful Voter Ballot Initiative to Cap Predatory Lending in Montana (published October 2011)
After another unsuccessful legislative session in 2009, the Cap the Rate Coalition decided to pursue a completely different strategy in 2010 – a voter ballot initiative to cap interest rates on payday and car-title loans…Because the opposition understood that I-164 would probably be approved by the voters if it made it to a vote, opponents spent more energy filing complaints against the I-164 campaign than campaigning to deliver a message to the voters. These complaints took two main forms: campaign finance complaints and legal complaints. The Cap the Rate Coalition was able to weather these storms, though the opponents were successful in draining time and resources during a critical time in the campaign. Click here to read more.
Defending Installment Loan Protections in North Carolina (published October 2011)
North Carolina has been a leader in efforts to protect consumers from predatory lending for more than a decade. In response to the large number of abusive home loans that lenders and housing groups witnessed at the time, allies in North Carolina first came together in the mid-1990s to form the North Carolina Coalition for Responsible Lending…The consumer -finance industry has been lobbying North Carolina legislators to raise the limit on interest rates and allow additional fees for more than 30 years…In 2011, Republicans gained control of both legislative houses. Some in the new majority were sympathetic to the industry’s arguments, which increased the likelihood of passage of industry-backed legislation to completely restructure the Consumer Finance Act. Click here to read more.
An Uphill Battle in New Mexico (published September 2009)
In 2002, payday lending in New Mexico was widespread, and payday lenders were operating virtually without limit… To address this problem, the United South Broadway Corporation - Fair Lending Center engaged a network of partners to launch the Campaign to Stop Predatory Lending, a broad-based coalition with the mission of ending predatory payday and mortgage lending, racial segregation and discriminatory lending practices in New Mexico. Click here to read more.
Payday Loan Reform in Illinois (published September 2007)
In 1999, Monsignor John Egan, a priest and nationally-recognized leader in the social justice arena, convened a group of religious leaders, consumer advocates, researchers, public interest organizations and social service groups to form the Campaign for Payday Loan Reform. The group launched a public effort to counter Illinois’ predatory payday lending industry… The Campaign succeeded in securing new regulations to cap the size of payday loans and limit the number of loans that consumers could hold and the number of times each loan could be refinanced. Click here to read more.
For a two-page overview of protections from predatory short-term loans, download CFED’s Policy Brief.
For an in-depth compendium of analysis, research, and resources on protections from predatory short-term loans, download CFED’s Resource Guide.