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States Fail to Protect Residents from Predatory Loans

Efforts against abusive lending practices fall short

August 28, 2008

Predatory Lending • Some Payday Lenders Operate Outside U.S. Law • Payday Lenders Resist APR Comparisons • Massachusetts Settles Predatory Lending Charges For $10 Million • California Payday Lenders Target Blacks, Latinos • States Battle Feds To Enforce Lending Laws • Payday Loans Can Lead to Bankruptcy • Study Disputes Lenders' Excuses for Charging Blacks and Latinos Higher Rates • ACORN Names Money Mart "Loan Shark of the Year" • States Battle Feds Over Predatory Lending Laws • States Warn Bill in Congress Would Roll Back Predatory Lending Protections • Ney-Kanjorski Bill A Ruse, Consumer Groups Charge • Business Interests Target "Activist" Attorney Generals • Option One Agrees to Clean Up Its Lending Practices in Pennsylvania • Pennsylvania Tackles Predatory Lending • Predatory Lending Guidelines Too Vague, Consumers Group Charges • North Carolina Court Strikes Down CitiFinancial's Mandatory Arbitration • Congress Targets Predatory Lending • CitiGroup Settles Predatory Lending Charges for $215 Million • Household Settles for $484 Million • Consumers File Class Action Suit Against Household • FTC Charges Associates, Citigroup With Predatory Lending Practices

Despite the subprime meltdown and tighter lending practices, many states are still falling down on the job when it comes to providing adequate protections for consumers against abusive lending practices.

A new report by Consumer Federation of America, Consumers Union, and the National Consumer Law Center rates the states on how well they protect consumers from excessive interest charges on certain small dollar loans.

"Americans who fall prey to abusive lending practices pay more to borrow money and often end up trapped in an endless cycle of debt," said Jean Ann Fox, director of financial services for Consumer Federation of America. "Unfortunately, many states aren't providing consumers with the protections they need to avoid being ripped off by modern day loan sharks."

States historically have taken the lead to ensure that consumers are not subject to abusive lending practices. The report evaluates how well states have exercised this responsibility by examining the statutory maximum annual percentage rate of interest for four typical small dollar loan products and whether these products' interest rates are limited by the state's criminal usury cap.

The four loan products evaluated in the report are payday loans; auto title loans; six-month, $500 unsecured installment loans; and one-year, $1,000 unsecured installment loans.

States received a "Passing" grade if the loan product's APR was 36 percent or less or if they prohibited payday or auto title loans. States that did not have a cap on the loan product's APR or those that allowed a loan product's APR to exceed 36 percent received a "failing" grade.

The 36 percent rate cap on small loan lending became a part of civil law in most states by the mid-twentieth century to address the widespread problem of loan sharking. In 2006, Congress enacted a similar 36 percent cap for extensions of credit to active-duty service members and their dependents because of concerns that many were being trapped in debt by abusive lending practices.

Based on a review of existing state laws governing the four loan products, the report found that:

• Eight states and the District of Columbia protect consumers against abusive lending practices for all four small dollar loan products: Arkansas, Connecticut, Maryland, New Jersey, New York, Pennsylvania, Vermont, and West Virginia. Massachusetts came close to earning a "Passing" grade for all four loan products but interest and fees for $500 unsecured installment loans in that state push the total rate to 37 percent.

• Fourteen states fail to protect consumers against abusive lending for all four products: Delaware, Idaho, Illinois, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Mexico, South Carolina, South Dakota, Tennessee, Utah, and Wisconsin. New legislation taking effect in New Hampshire on January 1, 2009 will cap interest for car title and payday loans at 36 percent, taking the state out of this category.

• States scored the worst when it came to payday loans. Thirty-eight states fail to protect consumers against high cost payday loans. Twenty-four states fail to protect consumers against abusive six-month, $500 unsecured installment loans and twenty-one states fail to protect consumers against expensive auto title loans.

• States scored better when it came to protecting consumers against abusive one-year, $1,000 unsecured installment loans. Thirty-three states and the District of Columbia received a "Passing" grade.

"The current subprime mortgage crisis shows how abusive lending practices harm not only individual consumers, but also the overall economy," said Elizabeth Renuart, attorney with the National Consumer Law Center. "Now that the economy is so tight for cash-strapped consumers, it is more important than ever for states to provide reasonable protection against rate gouging by small lenders. Reasonable rate caps are essential to protect consumers, lenders who charge reasonable rates, and the economy. After all, nations have imposed usury caps since at least Biblical times in recognition of the consequences to society when the price of debt drives citizens to destitution."

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