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By Charles Gerena of The Federal Reserve Bank of Richmond
Payday loans provide short-term relief for people in financial distress. But policymakers are grappling with the long-term headaches that these loans can cause.
Legislative Lowdown on Payday Lenders
State laws impact every payday lender in the Fifth District, either through direct regulation or by establishing general restrictions on consumer lending that would make Payday loans unprofitable. Some lenders partner with out-of-state banks to avoid these roadblocks. Others don't consider themselves part of the consumer lending industry, so they simply ignore limitations on finance charges. Here is a state-by-state breakdown:
Maryland — The state permits licensed check cashers to hold a personal check for as long as 10 days before depositing it, but they can only charge up to 10 percent of the check's face value for providing this service. If the amount due from the borrower is held for a longer period, the state's consumer lending laws apply. On loans of $2,000 and less, the maximum interest rate is 2.75 percent per month on the portion of unpaid principal that is $1,000 or less, and 2 percent per month on the unpaid principal that exceeds $1,000. In addition, consumer loans cannot exceed $6,000.
North Carolina — Legislation that regulated payday lending expired on July 31, 2001, but other limits on consumer loans still apply. On loans of $3,000 and less, the maximum finance charge is 36 percent per year on the portion of unpaid principal that is $600 or less, and 15 percent per year on the unpaid principal that exceeds $600. Also, consumer loans cannot exceed $10,000.
South Carolina — The state directly regulates "deferred presentment services"
in several ways. The maximum finance charge is 15 percent of the Payday loan,
the maximum loan term is 31 days, and loans cannot be rolled over into a new
term. The ceiling on Payday loans is $300.
Virginia — State legislation passed in spring 2002 requires payday lenders to be
licensed and imposes several restrictions on loans. The maximum finance charge
is 15 percent of the loan, the minimum term is seven days, and loans cannot be
rolled over into a new term. The ceiling on Payday loans is $500.
West Virginia — The state prohibits check cashers from making Payday loans, while consumer lending regulations impact others who offer such loans. On loans of $2,000 or less, the maximum finance charge is 31 percent per year on the unpaid principal. (The maximum charge is reduced to 27 percent per year on loans between $2,001 and $10,000.) Or, a lender can charge annual interest of up to 31 percent on the unpaid principal plus a nonrefundable fee of not more than 2 percent, but only on loans of $1,200 or less and only if there are no other charges. In general, consumer loans cannot exceed $45,000.
District of Columbia — Legislation governing check-cashing outlets includes specific restrictions on Payday loans. The maximum finance charge is 10 percent of the loan plus a $5 to $20 processing fee, the maximum loan term is 31 days, and loans cannot be rolled over into a new term. The ceiling on Payday loans is $1,000.
— Charles Gerena
Information provided by Advance America Inc. and supplemented with additional research.