Payday Loan Times

Claiming they are protecting consumers, lawmakers in Nevada, New Mexico and Oregon recently have clamped down on the short-term, high-interest fast payday loan lending industry, blaming it for saddling residents with dangerous levels of debt.

The spate of new laws targets payday lenders and other creditors who offer customers short-term loans - meant to tide them over to the next payday - that can carry annual interest rates exceeding 400 percent. Critics say the lenders prey on low-income borrowers who end up trapped in a cycle of costly repayments.

Oregon Gov. Ted Kulongoski (D) on Tuesday (June 19) signed a series of bills that place new restrictions on the fees charged by providers of instant payday loans. Nevada Gov. Jim Gibbons (R) on June 1 signed off on a plan to close a loophole in state law that has allowed some short-term lenders to charge annual interest rates as high as 900 percent.

In New Mexico, Gov. Bill Richardson (D) in March also approved legislation to limit the terms of payday loans, but consumer groups complain the law doesn’t go far enough.

Heated statehouse debates over payday cash advance lending also have taken place in Georgia and Virginia this year, pitting consumer advocates against lenders, who argue that state restrictions ruin their businesses and deprive customers of services they need.

The subject has gained traction in state legislatures since Congress last year passed a law capping annual interest rates on payday loans at 36 percent for military service members and their spouses, who frequently resorted to the lenders, according to analysts.

According to a legal analysis by the Consumer Federation of America, 12 states effectively ban payday lending: Arkansas, Connecticut, Georgia, Maine, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont and West Virginia.

In response to growing legislative pressure, cash advance loan lenders in February kicked off a year-long, $10 million advertising campaign to defend against what they consider unfair criticism - and to tout a new set of “best practices” to reassure borrowers. Among other standards, the guidelines call on lenders to use truthful advertising techniques and “appropriate collection practices” to retrieve payments.

“The product is good, but some people aren’t using the product correctly,” said Steven Schlein, a spokesman with the Community Financial Services Association of America (CFSA), which represents payday lenders and is footing the bill for the nationwide ad campaign.

At the center of the debate over payday lending is the question of whether annual percentage rates, or APR, should apply to short-term personal loans. Lenders, for example, typically charge $15 for a two-week, $100 loan. Schlein said payday customers think of that fee as 15 percent interest - not the 390 percent it amounts to annually. But consumer groups reject that argument.

“That’s like saying you shouldn’t quote the price of gas at $3 a gallon just because you bought half a gallon,” said Jean Ann Fox, director of consumer affairs with the Consumer Federation of America. More importantly, federal law requires interest rates to be calculated annually, Fox said.

Oregon’s new restrictions are being hailed by consumer groups because they target not only cash advance lenders, but other short-term lenders as well, including check-cashing businesses and those providing loans for vehicle titles. One of the main provisions of the package requires an annual interest rate cap of 36 percent across a spectrum of consumer loans, which, in the case of a $100 two-week loan, would amount to about $1.38 in fees.

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A hard-fought bill limiting the terms of high-interest personal loans was signed into law Friday by Gov. Jim Gibbons, following a final effort to get him to veto the plan.

Under AB478, a loophole will be closed in the state’s 2005 payday loan law. Assembly Speaker Barbara Buckley, D-Las Vegas, pushed the plan, saying some lenders were “motivated by greed” and were using the loophole to charge exorbitant rates.

Buckley said the bill had strong support from the military and consumer groups and had near-unanimous support in both the Senate and Assembly. It also was backed by some large no fax payday loan lenders who said it will help root out the industry’s “bad actors.”

Buckley also said that while some payday loan locations had been evading the 2005 law, about 500 were obeying it.

Several small payday loan companies had opposed the new bill, insisting they were “installment lenders” who should be regulated differently. Buckley said those companies had evaded the law by changing their contracts when the 2005 law took effect. Those changes allowed them to charge interest rates on payday loans ranging up to 900 percent for over a year.

Under AB478, any company charging more than 40 percent interest on a loan must limit the term of the loan to 35 days. If a borrower can’t pay the loan back after that time, the interest rate must drop to the prime rate plus 10 percent, or 18.25 percent in the current market.

Gibbons also signed AB375, which requires investors in short-term mortgage loans, often called trust deeds, to meet minimum financial requirements in Nevada.

Private lenders typically solicit investments from individual investors for the short-term loans, which are secured by real estate and generally pay double-digit interest rates.

But individual investors have lost millions of dollars in the last few years as some private faxless payday advance lenders have failed. Many retirees, however, continue to rely on trust funds as a key source of income to supplement Social Security benefits.

State Mortgage Lending Commissioner Scott Bice will set the minimum financial requirements by regulation under terms of the new
law.

Bice had pointed to stories about investors who invested all of their assets in trust deeds or borrowed money through a home equity loan in order to invest, and then lost their money when a private lender failed.

Meeting until midnight Friday and returning on Saturday, Nevada lawmakers took final action on dozens of bills, including a hard-fought bill to limit the terms of high-interest payday cash loans.

Many of those bills now move to Gov. Jim Gibbons for his signature, while others still need to have amendments approved by either the Senate or Assembly.

Bills that the two houses have passed with conflicting amendments will move into conference committees in the Legislature’s final full week, starting Monday.

The Senate voted 20-1 to give final approval to AB478, which Assembly Speaker Barbara Buckley, D-Las Vegas, said was needed to close a loophole in the state’s 2005 payday loan law.

Several small faxless payday advance loan companies opposed the law, insisting they were ”installment lenders” who should be regulated differently. Buckley said those companies were ”motivated by greed,” and evaded the law by changing their contracts when the 2005 law took effect. Those changes allowed them to charge interest rates ranging up to 900 percent for over a year.

Under AB478, any company charging more than 40 percent interest on a loan must limit the term of the loan to 35 days. If a borrower can’t pay the loan back after that time, the interest rate must drop to the prime rate plus 10 percent, or 18.25 percent in the current market.

The president of one Nevada payday loan company is speaking out against that payday loan high-interest assembly bill that went to the State Senate on Thursday.

The bill, AB-478, would mandate that companies only charge their highest interest rates for only 90 days, then lower the interest rate to prime-plus ten percent. Some of those companies currently charge as much as five, six, or seven hundred percent.

Carl Hull is President of Advanced Payday Loans and Check Cashing in Reno. He says AB-478 would hurt the industry and the consumers. He explains that his business helps people consolidate multiple no faxing payday loans into payments spread over a year.

He says if this bill becomes law, for certain people, payments could only be consolidated for over three months. He admits this plan simply doesn’t work for consumers.

Hull says the Nevada payday loan bill would also negatively impact the lending industry. He says without being able to consolidate loans over a year for a segment of customers, lenders could be forced into bankruptcy.

If the bill passes, Hull says interest rates as high as more than seven-thousand percent could still be charged on certain short-term payday advances.

The bill made its way to the Senate floor, but on Thursday afternoon, Senator Randolph Townsend asked that the bill be placed back on the back burner, so that wording could be changed.

The Senate is scheduled to vote on AB-478 on Friday, May 25th.

A bill targeting high-interest quick payday loan businesses faced some resistance but managed to win approval Thursday on a 4-1 vote in a key Nevada Senate committee.

The Senate Commerce and Labor committee endorsed Assembly Bill 478, with U.S. Sen. Warren Hardy, R-Las Vegas, casting the lone opposing vote. Other panel members expressed reservations about the bill, but voted to send it to the full Senate.

A few personal cash loan companies have continued to resist the bill sponsored by Assembly Speaker Barbara Buckley, D-Las Vegas, and passed unanimously last month by the Assembly.

Representatives of the businesses insist they are “installment lenders” that should be regulated differently. But the Senate committee rejected their amendments, which would have allowed them to continue to charge high interest rates for long periods.

All providers of payday advance loans charge high interest rates, ranging up to 900 percent, but under the 2005 legislation can only charge such high rates for 30 days. If a lender can’t pay back at that point, the lender must drop the interest rate.

State Sen. Joseph Heck, R-Henderson, said that the bill’s good provisions, including steps to protect the military from no fax cash loan lenders, were important. But he also was concerned about the bill.

“I think we’re going to wind up putting several businesses out of business,” Heck said. “We may wind up revisiting the measure.”

Felix Salcedo, a retired Reno justice of the peace who’s now a senior judge, added in comments to the Commerce and Labor Committee that he has seen cases of interest rates as high as 7,300 percent on no fax payday loans.

Salcedo said forms provided by the payday loan companies disclose the consequences of late or no payments by borrowers, “but when you’re desperate and need a couple of dollars it makes no difference what’s on that form.” In pressing for approval of AB478, Salcedo said cases involving quick payday advance lenders have clogged courts.

He said in most cases borrowers don’t show up to tell their side of the story, and lenders can get default judgments unless a judge spots an egregious case and tosses it.

Assembly Speaker Barbara Buckley, D-Las Vegas, said her AB478 would stop the abuses by closing a loophole in a 2005 instant cash loan law. Buckley describes the effect of the practices as creating “an endless cycle of debt” for borrowers.

Buckley also says almost 40 percent of civil cases in Reno’s justice courts and 34 percent of such cases in Las Vegas’ justice courts are brought by payday lenders.

Also urging approval of the bill was Capt. Scott Ryder, commanding officer of the Fallon Naval Air Station. Ryder said that a dozen payday loan store branches are clustered within a short drive of his base, and that unfair lending can ruin the lives of sailors and soldiers and hurt the country’s military readiness.

Representatives of payday loan companies identified as making use of the 2005 loophole have denied they’re evading the law. They’re expected to testify before Senate Commerce and Labor at a follow-up hearing next week.

Other companies have endorsed the bill. Buckley said that while some guaranteed payday loan locations are evading the law, about 500 are obeying it.

A 2005 law change banned abusive collection practices and limited the interest rates and fees charged by payday loans companies. Lenders can charge any rate for an initial period, but if a customer can’t pay it back, the rate must drop.

That law only applied to lenders that issue short-term personal loans, defined as one year or less. But some companies simply stretched out the terms of their loans to last more than a year, Buckley said, adding that her bill would limit fees and terms on any loan that charges more than 40 percent interest.

A judge urged a state Senate panel on Thursday to support legislation to end abuses by some Nevada payday loan companies charging interest rates that are “flat-out unconscionable.”

Felix Salcedo, a retired Reno justice of the peace who’s now a senior judge, added in comments to the Commerce and Labor Committee that he has seen cases of interest rates as high as 7,300 percent.

Salcedo said forms provided by the instant payday loan companies disclose the consequences of late or no payments by borrowers, “but when you’re desperate and need a couple of dollars it makes no difference what’s on that form.”

In pressing for approval of AB478, Salcedo said cases involving payday lenders have clogged courts. He said in most cases borrowers don’t show up to tell their side of the story, and lenders can get default judgments unless a judge spots an egregious case and tosses it.

Assembly Speaker Barbara Buckley, D-Las Vegas, said her AB478 would stop the abuses by closing a fast payday advance loophole in a 2005 law. Buckley describes the effect of the practices as creating “an endless cycle of debt” for borrowers.

Buckley also says almost 40 percent of civil cases in Reno’s justice courts and 34 percent of such cases in Las Vegas’ justice courts are brought by payday lenders.

Also urging approval of the bill was Capt. Scott Ryder, commanding officer of the Fallon Naval Air Station. Ryder said that a dozen payday loan store branches are clustered within a short drive of his base, and that unfair lending can ruin the lives of sailors and soldiers and hurt the country’s military readiness.

Representatives of bad credit cash loan companies identified as making use of the 2005 loophole have denied they’re evading the law. They’re expected to testify before Senate Commerce and Labor at a follow-up hearing next week.

Other companies have endorsed the bill. Buckley said that while some payday loan locations are evading the law, about 500 are obeying it.

A 2005 law change banned abusive collection practices and limited the interest rates and fees charged by payday loans companies. Lenders can charge any rate for an initial period, but if a customer can’t pay it back, the rate must drop.

That law only applied to faxless payday advance lenders that issue short-term loans, defined as one year or less. But some companies simply stretched out the terms of their loans to last more than a year, Buckley said, adding that her bill would limit fees and terms on any loan that charges more than 40 percent interest

The courts are swamped with lawsuits and one-third of all cases come from Nevada payday loan-type businesses. It’s a reflection of the loan industry and it is bogging down the courts.

The I-Team’s Adrienne Augustus explains why so many loan companies are filing lawsuits and how the courts are coping with it.

It’s a real problem for the county clerk’s office. About 60,000 civil cases are filed every year. Nearly 20,000 are lawsuits filed by loan companies against clients who didn’t repay their loan.

The court system is struggling to keep up. Everyday they show up by the box load - high interest, fast payday advance lenders and installment loan companies filing hundreds of lawsuits against their customers.

Kristina O’Conner, court civil division manager, said: “Five years ago, ten years ago you didn’t see this type of industry on the corners of the street. You saw more of the pawn shops, title loans, those types of items.”

O’Conner says the jump in payday loan online businesses directly affects the courts. They are a large reason court clerks are working mandatory overtime.

“The volume was so immense so quickly that it really has kind of bottlenecked with us in the court,” she explained.

The personal cash loan lending industry has steadily increased, despite a client default rate of more than 20-percent, which translates to loan companies and collection agencies suing thousands of people.

Those cases must be processed along with all of the lawsuits filed by everyone else. Many lawsuits filed by lenders end up in default judgment because the defendant doesn’t respond. That cycles more paperwork back to the clerks.

When a defendant does respond, the case ends up in front of a judge.

Chief Judge Douglas Smith, of the Las Vegas Justice Court, said, “The first one that I had was a bit of a shock when you had seven or 800-percent interest.”

Eight years ago Chief Judge Douglas Smith heard his first quick cash advance lending lawsuit. “I believe that I determined that it was a contract of adhesion, which means that it was a bad contract.”

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A KLAS TV report …

When rent money is gone or the paycheck hasn’t come, many Nevadans are in need of a quick buck. Sometimes they turn to payday lenders - companies that give short-term quick cash loans with high interest.

The State Assembly’s top lawmaker is fighting to stop these predatory lenders. Speaker Barbara Buckley wants to control lending terms for loans to keep interest rates down.

Right now, these fast payday loans can last a year or more and have interest rates as high as 600, 700 or even 800-percent rates, meaning a loan for $800 could cost you more than $5,000.

Lending restrictions that went into effect this year were meant to protect consumers by regulating all payday-type lenders. This new proposed legislation would tighten those already strict regulations, and some lenders are fighting it.

When Richard Swanson collects on the loans he issues, customers like Rick Taylor can end up paying 260-percent in interest a year. But to Taylor, that’s a lot better than what a friend paid with another faxless payday advance lender.

“You’re talking 500-percent or more at some of these places and I always thought it should be state regulated or something should be done. To me it’s really a rip,” said Taylor.

Current state law put restrictions on payday lenders who charge exorbitant interest rates on contracts shorter than one year. But Swanson isn’t a payday lender.

Loan Depot is an installment loan company. His contracts simply require clients to promise to repay the personal loan. Swanson recently extended his contracts to up to two years, falling outside of the state guidelines.

“Our rates are a lot lower than the check loans, the payday loans,” explained Rick Swanson, owner of Loan Depot. “It’s a lot easier to pay back a lot less over a longer period of time to get back on your feet than a payday loan where you have to pay back every two weeks or roll it over.”

Swanson says the installment loan method of lending sets him apart from payday lenders. But state lawmakers don’t agree. Assemblywoman Buckley is proposing legislation that would catch installment lenders in the same restrictive net as cash advance loan lenders.

“So, we’re making it really clear that the law applies to all of the high interest loans,” she said.

Where the current law reads short-term loan services, Buckley wants to change it to high-interest loans. That means all high-interest, long-term installment lenders - including installment lenders like Swanson - would face the tighter lending restrictions.

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Assembly Speaker Barbara Buckley says several companies are evading Nevada’s payday loan laws by using a loophole that enables them to charge sky-high interest rates - and she’ll push for a law to close it during the 2007 legislative session.

The payday loan law, passed in 2005, limited the amount of interest that companies can charge on the loans and restricted how they can collect from delinquent customers.
The law applied only to short-term loans, which are defined as cash advance loans with a payment period of one year or less. That definition was included to avoid applying the law to banks and other traditional lenders.

Buckley, D-Las Vegas, said most of the companies in the payday loan business complied with the law, but some companies changed their contracts to extend the term of repayment beyond one year.

“Six lenders chose to completely evade the law by rewriting their contracts,” said Buckley. “It has probably affected tens of thousands of people.”

Those new contracts allow borrowers to make weekly payments, while charging interest of up to 900 percent, Buckley said.

Buckley declined to name the companies involved, but plans to hold hearings on the issue. A few of the cash advance payday loan companies are modest in size, but two of them have more than a dozen locations around the state.

Alfredo Alonso, a lobbyist for Money Tree, a payday loan company that follows the 2005 regulations, said his client supports Buckley’s attempts to regulate the industry. The current law already has had some success stamping out “bad actors” in the industry, said Alonso, but the one-year exception should be closed.

“In an attempt to keep the larger banks out of it, they created a loophole,” said Alonso. “It’s unfortunate that people took advantage of that. We believe everybody should be playing by the same rules.”

The 2005 law allows payday loan companies to charge any interest rate for the term of the loan, typically two weeks or a month. But if the borrower fails to pay these no fax payday loans back, the interest rate must drop to the prime interest rate, plus 10 percent.

In today’s market, that would be 18.25 percent.

The law also limits the types of fees that loan companies can charge, and requires them to disclose the fees in the loan agreement.