CFED Assets & Opportunity Scorecard
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.
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?|
|State||Protect against payday lending?||Interest rate cap 1||Protect against car-title lending?||Interest rate cap 1||Protect against installment loans? 2||Protect against high-cost, closed-end installment loans? 3||Limits on cost of open-end credit? 4|
|Delaware||No cap||No cap||No||No|
|District of Columbia||24%||Prohibited||Yes||—|
|Idaho||No cap||No cap||No||No|
|Nevada||No cap||No cap||No||Yes|
|New Mexico||409%||No cap||No||No|
|Ohio 8 9||No cap||Prohibited||No||No|
|South Dakota||No cap||No cap||No||No|
|Texas||No cap||No cap||No||Yes|
|Utah||No cap||No cap||No||No|
|Wisconsin||No cap||No cap||No||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.
Organizations and Experts:
- Center for Responsible Lending
- Pew Center on the State, Safe Small-Dollar Loans Research Project
- National Consumer Law Center
- Consumer Federation of America
Guides, Briefs and Papers:
- “The 182 Percent Loan: How Installment Lenders Put Borrowers in a World of Hurt,” ProPublica, May 2013.
- “Car Title Lending: Disregard for Borrower’s inability to Repay,” Center for Responsible Lending, May 2014.
- "Payday Loans and Deposit Advance Products: A White Paper of Initial Data Findings," Consumer Financial Protection Bureau, April 2013.
- "Payday Lending in America: How Borrowers Choose and Repay Payday Loans," The Pew Charitable Trusts, February 2013.
- "Payday Lending in America: Who Borrows, Where They Borrow, and Why," The Pew Charitable Trusts, July 2012.
- Borne, Rebecca and Smith, Peter, "The State of Lending: Bank Payday Loans," Center for Responsible Lending, September 2013.
- Montezemolo, Susanna, "The State of Lending: Payday Lending Abuses and Predatory Practices," Center for Responsible Lending, September 2013.
- Saunders, Lauren K., "Why 36%? The History, Use, and purpose of the 36% Interest Rate Cap," National Consumer Law Center, April 2013.
- "Resource Guide: Protections from Predatory Short-Term Loans, " CFED, 2014.
- “CFPB Data Point: Payday Lending,” Consumer Financial Protection Bureau, March 2014.
- “Installment Loans: Will States Protect Borrowers from a New Wave of Predatory Lending?” National Consumer Law Center, July 2015.
- "Payday and Car Title Lenders’ Migration to Unsafe Installment Loans," Center for Responsible Lending, October 2015.
CFED thanks Diane Standaert and Brandon Coleman from Center for Responsible Lending for their input and expertise on this policy issue.