Industry Regulation and Recent Legislation

A number of states from coast to coast are attempting to impose further regulations on the payday loan industry, but without much success in many cases. Consumers of payday loans have generally argued against more stringent measures and limitations, that would limit their access to payday loans. And, in the meantime, the payday loan industry continues to grow, both in the numbers of loans issued and the dollar amounts of loans issued.

In Washington State, there were no less than 14 bills introduced during the 2004-2005 legislative session, with the specific intent of more tightly regulating the payday loan industry. Nine of the most aggressive proposals stalled in committee. If passed, these bills would have lowered payday loan interest rates and decreased the maximum amounts that a borrower could access.

Even more heavily opposed was a proposal to establish a statewide database of payday loans, giving both the industry and the state a way of looking at how many payday loans a borrower already had when he or she applied for another. This measure was designed to prevent borrowers from seeking loans from multiple lenders. Some analysts viewed the proposal as a potentially dangerous intrusion into people's personal finances. The payday loan industry contended that cutting interest rates and putting a lower cap on loan amounts would significantly damage their business.

Most of the regulations proposed in Washington were stalled in legislative committees and never reached the floor of the legislature.

A bill passed two years ago in Washington already provided a number of consumer protections. The state requires, for example, that borrowers have the right to cancel a loan within one business day. A borrower 'payment plan' was also made mandatory, requiring that once a borrower has received four loans from the same lender, he or she is allowed to work out a repayment plan over at least 60 days.

The State of Oregon has also been embroiled in a payday loan controversy including attempts to restrict an industry that is largely unregulated in that state. A bill proposed during the 2004-2005 legislative session would have imposed mandatory 31 day loan periods, effectively eliminating the practice of rollovers.

More than 1500 clients of just one payday lender wrote urging the Oregon legislature not to pass the proposed restrictions. In general, those individuals said they valued being able to access short term loans quickly and easily, without having to depend on the good will of family or friends when they ran into an emergency cash flow situation. They also indicated that they did not consider the interest rates unfair.

At the same time, the dollar amount of payday loans granted in Oregon has grown by 285 percent in the past five years, and the number of loans issued has grown 138 percent in the same time period.

In New Mexico, the State House of Representatives introduced a bill that would limit payday loans to $1,000 each and imposed restrictions on some fees and charges. While the legislation did not prevent rollovers, it specified that a loan was forgiven once the customer had paid twice the amount that was originally borrowed. Consumer groups and the state's Attorney General pushed for a payday loan interest cap. Arizona's governor has stated that he will not sign the measure because it fails to provide adequate protection for borrowers.

On the other side of the U.S., in the State of Maine, lawmakers have been asked to approve changes to existing laws that would allow significant expansion of the payday loan industry. Under current state law, fees are capped at $15 for loans up to $250, and at $25 for loans exceeding $250. One of the proposed changes in that state would allow lenders to charge as much as 17.5% per week, which would amount to $17.50 per $100.

In addition, payday lenders in Maine would be exempted from the state's existing consumer credit code. They would be allowed to use advertising methods that are currently prohibited and to have greater leeway in collection methods in the event of default.

The U.S. Military contends that military personnel are disproportionately targeted by payday loan companies and that lenders adjacent to military bases charge higher rates of interest. A recent study lends some validity to that point of view.

Most of the recent legislation aimed at regulating payday loans across the country, however, is aimed at in-state, storefront businesses, rather than Internet based lenders. It may be that Internet payday lenders have not been targeted as aggressively because they tend to be much more competitive, offering lower interest rates and lengthier repayment terms.