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Senate Bill Would Rein in Payday Lenders

Proposed legislation would cap interest rates

February 27, 2009

In 2006, at the urging of the U.S. Defense Department, Congress enacted an almost identical cap on loans made to active members of the military. The Pentagon complained that men and women in uniform were being victimized by payday lenders' debt spiral.

The measure has the support of the Center for Responsible Lending, which says the cap would stop abuses by payday and car-title lenders at a time when keeping as much cash as possible in the hands of borrowers is crucial to restoring health to the U.S. economy. And it says the law would apply to credit products over which states have no jurisdiction.

"A 36 percent cap on annual interest for consumer credit is a quick, common-sense way to restore protections that have been severely compromised in the consumer credit market," said CRL president Michael Calhoun. "It would cost taxpayers nothing and plug a $5 billion hole in the wallets of working families."

The measure would not affect loans with reasonable interest rates and other manageable terms but would eliminate products that rely on extremely high rates — some carry 400 percent annual interest and higher — and trap consumers in debt they cannot afford.

Ohio, Arkansas, New Hampshire, and Arizona are among states that recently revoked legal exemptions from usury caps their lawmakers once gave payday lenders. CRL says state lawmakers reimposed the usury cap after seeing firsthand the harm payday lending inflicts on borrowers, who typically can't escape quickly from such high-cost debt.

But 35 states have yet to pass reforms that stop such practices.

Payday loans are marketed as an advance on a borrower's next paycheck, but critics charge the terms of these small loans are designed to keep borrowers paying high interest payments over long periods of time without paying off the loan or even paying down the principal.

The federal measure would give all citizens an equal measure of protection but also would allow state lawmakers to set even stronger protections if they deemed it necessary. Arkansas limits interest to 17 percent within its state constitution, New York makes interest above 25 percent a criminal offense, and Ohio passed a 28 percent cap last year, which was affirmed by voters in a ballot measure in November. A federal cap would not alter these state protections.

"Recent research links predatory products like payday lending to bankruptcy, closed bank accounts, credit card delinquency and a long list of other financial hardships," said Calhoun. "There is really no excuse for failing to stop these abuses now, for the sake of working families across the nation, and for the sake of our economic stability. We see where lax consumer protections led us in the mortgage market. We should learn from that hard-taught lesson."

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