New Payday Lending Regulation Begins In 2010

by Gabe Bullard on December 31, 2009

Regulators in Kentucky will have new power to pursue unscrupulous payday lenders starting Friday, as parts of a law passed in March take effect.

The law raises license fees for payday lenders and gives state officials more power to punish lenders who violate laws. In July, the law provides for a statewide database to keep anyone from taking out two simultaneous loans totaling 500 dollars or more.

The Kentucky Coalition for Responsible Lending has fought for tighter restrictions on payday lenders. Coalition attorney Anne Marie Regan says the law doesn’t go far enough, and she would rather see legislation cap payday loan interest rates at 36%.

“This new law does nothing to address the high cost of the lending and also does nothing to address the cycle of debt that people get into with these kind of loans,” she says.

Lenders say they provide tax revenues to states and a vital service to responsible adults, and argue that the average loan is paid off at an interest rate under 20%.

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Payday Lending Rep January 4, 2010 at 2:52 pm

A few points regarding Ms. Anne Marie Regan’s comments. Instilling a 36% APR on payday loans would essentially mean a ban on the service because the total fee charged on a $100, two-week payday loan would be $1.38. Payday advance lenders could not cover the cost of originating a loan, let alone meeting employee payroll and benefits and other fixed business expenses.

Also, before talking about the “high cost” of payday loans, Ms. Regan should take a look at how they compare to many consumer alternatives, even when expressed as annual percentage rates for two-week terms:

– $100 payday advance with $15 fee = 391% APR
– $100 bounced check with $55.59 NSF/merchant fee = 1449% APR
– $100 credit card balance with $37 late fee is 965% APR
– $100 utility bill with $46.16 late/reconnect fees = 1203% APR
– $29 overdraft protection fee on $100 = 755%.

Payday advances are two week, not annual loans and as such, they cannot be offered at the same annual rates as annual credit products such as credit cards, auto loans and home mortgages.

As far as addressing the “cycle of debt” allegations, under CFSA Best Practices, any customer who cannot payback their loan when due has the option of entering into an extended payment plan, allowing them to repay the loan over a period of additional weeks. This option is provided to customers for any reason and at no additional cost.

The truth is that millions of customers across the country have used payday advance responsibly and appreciate having somewhere to turn when they need quick access to credit. Analysts estimate payday advances were used by 19 million households in 2008.

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