Critics will often say that payday loans are abusive. In fact, this has been a common complaint in recent years. Some of these critics are even asking for more legislation and regulations for the industry. Payday lending businesses across the United States have been opposing this, showing the world the service they offer to large sections of the population who need the cash urgently, often without anywhere else to turn to. The world is slowly coming round to this view and accepting it.
Newsweek recently published a report, which says the payday lending industry is extremely regulated, which is in stark contrast to what the critics are saying. They have drilled down and examined the state-level and federal regulations that are in place at this time, and also the jurisdictions at the municipal levels to finally arrive at this conclusion.
Let us now take a closer look at the regulations that are in place at the federal and the state levels. We can understand this even better if we look closely at one state and a city in that particular state. This will help us understand the regulations governing payday lending at all levels in the United States.
Federal Regulation in the US
Adequate regulation is in place already for the payday loan industry. For instance, all types of lending in the US, is being regulated by the ECOA or the Equal Credit Opportunity Act, and payday is a part of this. ECOA is a Civil Rights-era law, which makes it illegal for creditors to consider gender, color, race, religion, nationality, age, marital status and income while underwriting loans.
All lending businesses have to obey consumer protection regulations, such as the Truth in Lending Act of 1968 that standardizes and regulates disclosures for lenders. False advertising and misleading disclosures can be fined heavily.
There is also the MLA or the Military Lending Act, which prohibits loans to be offered at over 36% interest to people in active military duty or their spouses. It also bans practices like early repayment fees.
Every lender, including payday loan businesses have to obey their state laws. Lending products, such as credit cards, for instance, and also mortgage lending don’t have to comply because of a 1978 US Supreme Court ruling (Marquette National Bank of Minneapolis vs. First of Omaha Service Corp.), where it was said that the state’s anti-usury laws would not apply for nationally chartered financial institutions.
Payday lenders are not chartered nationally. They are all state chartered, and so, they are legally bound to obey the state laws.
State Regulation
In the United States, most regulations are actually at the state and the municipal levels. In fact, in all the 50 states of the country, there is some form of regulation for payday lending. It can be said that there are three regulatory regimes, which are:
1. Permissive – The states with the least regulations for payday lending, where the fees can be 15% or more and the amount can be paid back in 1-2 weeks.
2. Restrictive – The states with the maximum regulation where payday lending is effectively banned. In the former years, these states also banned postdated checks, which was the only way storefront lenders used to operate.
3. Hybrid – This is in between permissive and restrictive. There are restrictions on how many loans a borrower can take or rate caps. Early repayment and installments are allowed.
Texas State Law
There is significant regulation already in the US state of Texas, governed by the OCCC or the Texas Office of Consumer Credit Commissioner. There is “usury law” in place in the state, which places a limit on how much interest a lender can charge from a person. According to the Texas laws, creditors are not allowed to charge interest more than 10% without being licensed. The only exception is when civil court passes a judgment allowing this. But then too, it has to be lower than 18%.
For a payday lending business to operate in the state, under the Texas State Finance Code Chapter 393, Texas Administrative Code Chapter 7, Part 5, Chapter 83, Subchapter B, if a business charges more than a certain fee, then it has to be registered as a CAB or a Credit Access Business.
Payday lending is also governed by the Texas Finance Code. This applies to both storefront loan providers and online lenders. The maximum term of the loan can be one month for a loan of $100 or less for multiples of $10. If it is more than $100, then it would be $20 for each multiple.
In Texas, lenders cannot issue a payday loan of more than $1800. Borrowers are also not allowed to take multiple loans, if the amount of these loans crosses $1800.
In a few states, defaulting on the repayment can be considered a criminal violation. In Texas, however, there is no criminal violation, even if you willfully default. So the lending business cannot charge you in a criminal court. But, the lender can still charge you in a civil court, and force you into bankruptcy.
Houston City Laws
The city of Houston has passed regulation, which is, in fact, more restrictive than the state of Texas. It was in 2013 when Houston passed an ordinance for payday lending. This legislation is based on model legislation of Texas Municipal League. Here are some of the major features:
• CABs or Credit Access Businesses have to be registered with the city.
• CABs cannot issue an unsecured loan, which is more than 20% of the gross monthly income of the borrower.
• More than 4 installments or 3 renewals/rollovers are not allowed.
• Each installment amount must pay off the loan principal by a minimum of 25%.
Many other cities in the state of Texas, such as Dallas, Amarillo, Austin, San Antonio, Galveston, Garland, El Paso, Baytown, Midland, and South Houston are also following similar laws. However, it is still not clear whether cities have the power to enforce an ordinance on businesses that are not registered there. However, one thing is clear. Municipal legislation for payday lending is very proactive in Texas.
Of course, there is plenty of regulation in place already in the other states of the US and also at the city levels throughout the country to protect consumer interest and stop businesses from practicing unethical and illegal practices.
That is not all. The CFSA or the Community Financial Services Association of America, the trade group of payday lenders, is also ensuring that their member businesses are operating legally and ethically. The CFSA frames rules after detailed research, which includes inputs from the public, industry and consumer roundtables, field hearings, advisory bodies, and small business review panels. Proposed rules are then created. All stakeholders are then invited to comment. The CFSA also ensures that deceptive lead generation and advertising is stopped.
Enough Regulations Already
So you see, there are enough regulations already at the federal, state and municipal levels. It would thus be wrong to say that more regulations are required to reign in the payday lenders, as is the demand of the many critics. If that is done, then it would practically be the end of the business, which is serving the millions of Americans who need the cash advance in real emergencies. In fact, many of these people don’t have anywhere else to turn to other than the payday lenders when they need a loan.
The payday lending businesses are here for the long-term. It is in their interest that the consumers are able to pay back, because only then will they have the funds to make loan offers to others. Payday lenders will thus do everything in their powers to help their clients pay back. If they cannot repay in time, then many lenders will even agree on an extension and a revision of the terms of the loan.
There is absolutely no reason to fear payday lending. Millions of people across the country are taking these short-term loans when they need cash in the middle of the moth and are paying back in time. It’s just a small portion that is defaulting, which, in fact, is the case with any type of loan, and not just payday lending.
Just know the current laws at the federal level, the laws in your state and city that protect you. Ask all the questions you have before taking the loan. Read the terms and conditions carefully before finally taking the loan. You will be adequately protected.
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