In recent years, payday lenders have become ubiquitous, driven by a burgeoning demand for short-term fast cash loans. The gradual and continual growth of the payday lending industry, as well as the high risk nature of cash advance loans, prompted both the states and the federal government to pass laws regulating the popular product. Aimed at consumer protection, the payday loan laws crack down on unscrupulous and predatory creditors who exploit cash-strapped consumers and ensure that the transaction is fair and transparent.
Payday loan laws vary from state to state, and regulation is mainly the purview of individual states. Cash advance loans are legal and regulated in thirty-seven states. The District of Columbia and approximately half of the states have laws specifically permitting payday loans. Payday loan laws typically require registration or licensing and may require a minimum amount of assets or a bond. Some state laws set minimum and/or maximum loan amounts and terms and usually cap interest rates and fees. Some states do not require a payday loan company to abide by interest rate ceilings on consumer loans and/or have specific statutory provisions governing payday loans. Those states are West Virginia, Vermont, Pennsylvania, North Carolina, New York, New Jersey, Massachusetts, Maryland and Connecticut.
It is either not feasible or illegal for a cash advance store to operate in Georgia and 12 additional states. In fact, Georgia's 2004 legislation classified payday lending as a felony. Numerous states limit the number of loan renewals or rollovers that payday lenders may offer. This limitation is designed to protect consumers by encouraging a short-term, judicious utilization of a cash advance company's services. The Community Financial Services Association of America (CFSA), a trade association representing the cash advance industry, restricts its members to four renewals or the state maximum, whichever is lower. Some states have payday loan laws restricting the number of loans an applicant may request at a single time. In a number of states, a borrower is limited to a certain number of loans per year, or a cash advance store is required to offer a lower interest loan of a longer duration to customers who have renewed their loans a specific number of times. Such provisions are aimed at ensuring that borrowers exit the debt cycle.
While some states explicitly prohibit a payday loan store from operating, others ban the practice by way of usury laws which place a cap on interest rates. In most states, a payday lender is usually subject to small loan acts which operate as exceptions to the standard usury ceiling. These special usury laws fix 1) the duration of the loan, 2) the amount of the loan, and 3) the annual interest rate at up to 36%. They also set forth mandatory contract provisions while proscribing others and contain a number of reporting regulations. In approximately one-third of the states, a cash advance company is subject to both criminal usury laws and small loan acts. In six states (apart from South Dakota) that repealed usury limits, a cash advance store may charge unlimited fees and any interest rates, provided that it complies with other small act provisions and that borrowers provide their consent.
While the states generally regulate payday lending, the U.S. legislature passed a law restricting the annual percentage rate (APR) to 36% on loans to military personnel. Other consumer credit protection laws affecting payday lenders are the 1) Truth in Lending Act (TILA), 2) Fair Credit Reporting Act, and 3) Fair Debt Collection Practices Act (FDCPA). TILA and Regulation Z, which implements the statute, require a cash advance store to provide accurate and clear disclosure, in bold typeface print, of APR, finance fees, and other loan terms and costs. Pursuant to the Fair Credit Reporting Act, a payday loan company must provide notice to consumers when their application is denied. Also, when it takes adverse action as a result of information sent by a consumer reporting agency, the cash advance store must furnish the latter's name and address to the applicant or consumer. The FDCPA protects borrowers from harassment, abuse, as well as unethical, illegal and unfair debt collection methods. States have passed their own fair debt collection laws prohibiting such deceptive actions as threats to arrest defaulting borrowers.