CFED Scorecard

CFED Assets & Opportunity Scorecard

Financial Assets & Income
Predatory Small-Dollar Lending Protections
Overview

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. Regardless if the loans are structured as a single balloon payment or payable in installments, 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 cause a loss of borrower’s assets, such as their cars or bank accounts. States have the power to regulate predatory small-dollar lending by prohibiting predatory loans or capping the costs at 36% APR or less.

Borrowers who use predatory small-dollar loan products often pay more for loans than other consumers. For example, a typical payday loan borrower takes out eight loans of $375 each per year and spends $520 on interest. Although the payday lending industry claims these loans are one-time loans, research has shown that the average payday borrower remains in debt for more than half of a year – double the length of indebtedness recommended by the Federal Deposit Insurance Corporation (FDIC). Three-quarters of payday loan fees come from borrowers stuck in more than 10 loans a year.

What States Can Do

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 a 36% or less annual rate cap, inclusive of all fees and charges. Research suggests that state efforts to address high-cost payday lending without such rate caps have been largely unsuccessful.

States should also prohibit the sale of credit insurance and other ancillary products frequently sold in conjunction with installment loans that significantly increase the cost of the loan with little to no benefit for the borrower. States should also be sure to prevent high-cost lenders from exploiting loopholes to offer unsafe installment loans structured as open-end lines of credit.

There are many incremental steps that states can take to curb predatory lending such as authorizing caps on loan amount, caps on the number of loans an individual can receive a year and caps on the length of the loan.

Strength of State Policies: Predatory Small-Dollar Lending Protections

Does state protect against payday lending?Does state protect against car-title lending?Does state protect against high-cost installment loans?
StateProtect against payday lending?Interest rate cap 1Protect against car-title lending?Interest rate cap 1Protect against installment loans? 2Protect against high-cost, closed-end installment loans? 3Limits on cost of open-end credit? 4
Alabama 5 456% 300% No No
Alaska 443% Prohibited Yes Yes
Arizona 36% 204% No Yes
Arkansas 17% Prohibited Yes
California 460% Prohibited No No
Colorado 6 Prohibited Prohibited No No
Connecticut 30% Prohibited Yes Yes
Delaware No cap No cap No No
District of Columbia 24% Prohibited Yes
Florida 342% 30% No Yes
Georgia Prohibited 304% No
Hawaii 460% Prohibited Yes No
Idaho No cap No cap No No
Illinois 404% No cap No No
Indiana 391% Prohibited No No
Iowa 358% 35% Yes No
Kansas 391% No cap No No
Kentucky 471% 36% No
Louisiana 7 574% Prohibited No Yes
Maine 30% Prohibited Yes No
Maryland 33% Prohibited Yes No
Massachusetts 23% Prohibited Yes No
Michigan 375% Prohibited No No
Minnesota 235% 116% No Yes
Mississippi 572% 300% No No
Missouri 1955% No cap No No
Montana 36% 36% Yes
Nebraska 460% Prohibited No Yes
Nevada No cap No cap No Yes
New Hampshire 36% 300% Yes No
New Jersey 30% Prohibited Yes Yes
New Mexico 409% No cap No No
New York 25% Prohibited Yes Yes
North Carolina 36% Prohibited Yes Yes
North Dakota 520% Prohibited No
Ohio 8 9 No cap Prohibited No No
Oklahoma 396% Prohibited No No
Oregon 10 36% 154% Yes Yes
Pennsylvania 24% Prohibited Yes Yes
Rhode Island 261% Prohibited Yes No
South Carolina 391% 117% No No
South Dakota No cap No cap No No
Tennessee 11 313% 264% No No
Texas No cap No cap No Yes
Utah No cap No cap No No
Vermont 18% Prohibited Yes
Virginia 610% 264% Yes No
Washington 12 390% Prohibited Yes No
West Virginia 31% Prohibited Yes No
Wisconsin No cap No cap No No
Wyoming 313% Prohibited Yes No

Notes on the Data

1. 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. States receive credit for protecting against predatory payday loans and car-title loans if they either prohibit the loan or cap rates at 36% APR.

2. States receive credit for protecting against high-cost installment loans if they both protect against high-cost, closed-end loans and limit costs on open-end lines of credit. Open-end lines of credit, also known as revolving credit, only require borrowers to make a minimum payment toward the total amount owed each month.

3. States receive a "Yes" if the "Full APR" as calculated in the July 2015 report by the National Consumer Law Center, "Installment Loans: Will States Protect Borrowers from a New Wave of Predatory Lending?" for both a $500 six-month, closed-end installment loan and $2,000 two-year, closed-end installment loan is about 36% or less. For the purposes of NCLC's report, the "Full APR" includes the interest allowed under state law, in addition to all fees specified in the statute that are a condition of the extension of credit.

4. States receive a "No" if the state does not have a cap on both the interest and fees for open-end lines of credit offered by non-bank lenders, as calculated in the July 2015 report by the National Consumer Law Center, "Installment Loans: Will States Protect Borrowers from a New Wave of Predatory Lending?", or if the cap is so high (279% in the case of Tennessee) as to amount to no cap at all. A "-" indicates that the state law has no specific provisions for non-bank lenders to extend open-end credit.

5. Alabama's "Full APR", as calculated in the NCLC July 2015 report, for a $500 six-month loan is capped at 39%, however there is no cap on a $2,000 two-year loan.

6. 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 189%.

7. Louisiana prohibits car-title lending, but car-title lenders still are able to charge high APRs on loans by operating under the Louisiana Consumer Credit Law. For more information see: Delvin Davis, Tom Feltner, Jean Ann Fox and Uriah King, "Driven to Disaster: Car-Title Lending and Its Impact on Consumers," Center for Responsible Lending and Consumer Federation of America, February 2013.

8. In 2008, the Ohio legislature enacted and voters affirmed a 28% APR rate cap for short-term loans. Payday lenders migrated to the state's Second Mortgage Loan Act to avoid the cap and continue triple-digit interest rate lending, which was upheld by the Ohio Supreme Court in 2014.

9. Although car-title lending is not authorized under Ohio law, some car-title lenders are operating under statutes not intended to regulate their practices and may be operating illegally.

10. While Oregon's payday loan maximum APR cap is 36%, lenders may still charge initial loan fees of $10 per $100 borrowed, up to $30, which would be higher than any other state with a rate cap.

11. In Tennessee, the cap on open-end line of credit allows for 279% APR, which is essentially no cap at all.

12. Washington limits borrowers to eight payday loans in any 12 month period. This has substantially decreased payday loan volume and fees paid by payday loan borrowers. See "2014 Payday Lending Report," Washington State Department of Financial Institutions.

How States Are Assessed

States receive credit for protecting against predatory payday loans and car-title loans if they either prohibit the loan or cap rates at 36% APR. Each type of loan is evaluated separately. 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.

States receive credit for protecting against high-cost installment loans if they both protect against high-cost, closed-end loans–by capping the full APR of a $500 six-month and a $2,000 two-year installment loan at 36% or less—and limit costs on open-end lines of credit. Open-end lines of credit, also known as revolving credit, do not have fixed loan amounts or payment terms and typically only require borrowers to make a minimum payment toward the total amount owed each month.

What States Have Done

Many states have recognized the harmful impact of predatory small-dollar lending. A majority of states regulate these practices in some way, although laws offer varying degrees of protection. Overall, 17 states and the District of Columbia cap at 36% APR or lower or prohibit payday loans, 29 states and D.C. cap or prohibit auto-title loans, and 7 states protect against high-cost installment loans. Five states—Connecticut, New Jersey, New York, North Carolina and Pennsylvania—have prohibited or capped all three types of predatory loan products.

Resources

Organizations and Experts:

Guides, Briefs and Papers:

Acknowledgements

CFED thanks Diane Standaert and Brandon Coleman from Center for Responsible Lending for their input and expertise on this policy issue.

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