Legislators Hope To Cap Payday Loan Interest Rates
There has been criticism about the interest rates charged by short-term lenders. State legislators have listened and in some states there have been moves to cap those interest rates.
By the end of the second quarter of this year, 15 states and the District of Columbia had enforced two-digit interest rates. Some states even have taken the ultimate steps of making short-term lending illegal. The total now is 14 states.
Only Wisconsin and New Mexico have no regulations affecting the industry. But even that could change. One Wisconsin lawmaker recently submitted a bill called the Predatory Lending Consumer Protection Act to cap payday loan interest rates at 36%. A loan agency representative caught violating the proposed regulations would have to pay up to $500 in fines and serve up to six months in jail.
In Utah, state Rep. Laura Black tried to find support among her colleagues for a 100% annual interest rate cap on unsecured loans in their state. However, the measure didn’t make it past the House Business and Labor Committee.
Some of the activity is a reflection of what voters want. Ohio voters endorsed by a 3-to-1 margin a 28 percent rate cap passed by the state legislature. In Arizona, they rejected 3-to-2 a measure that would have made 391 percent interest rates legal indefinitely, cancelling the expiration of an exemption from a 36 percent rate cap for payday lenders. In Ohio, voters reaffirmed a decision to impose a 28 percent limit.
Elsewhere, Arkansas’ state constitution limits the interest rates to 17%. It’s considered a criminal offense for a payday loan agency to exceed 25 percent in New York. Kentucky’s governor indicated his support of a 36% financing rate limit when he signed a state House bill into law.
Payday loan industry officials point out their customers cannot be served elsewhere because they have little or no established credit. As a result, those same customers do not have easy access to loans from banks or credit cards, the officials contend. Also, capping the interest rates would make the industry less profitable.
The issue already is moving beyond the state lawmakers. In 2006 Congress passed a 36 percent cap for active military after saying the loans impacted the combat readiness of soldiers. Now both the House and the Senate have recommended caps as ways to help revive spending that’s critical to the revival of the economy. Some payday loan customers report dealing with credit card delinquencies, closed bank accounts and bankruptcies.
A federal measure would provide consumers with equal protection from what some critics have called “legal loan-sharking.” Any congressional legislation also would let state lawmakers establish more stringent protections if considered necessary. A cap from the federal government would not alter such protections.