By: Javi Calderon
Kentucky Sets the Bar on Payday Loan Reform
Even though the State of Kentucky is one of the most tightly regulated in the country in terms of payday lending, the state chapter of the Coalition for Responsible Lending is still not satisfied.
Across the country cash advance loans have built up quite a negative stigma, but in Kentucky this opinion seems to be particularly off base. The Coalition maligns the state payday loan industry by claiming that lenders are handing out loans at 400% interest, when in fact, by Kentucky law lenders can only charge a one-time fee and cannot legally charge any interest at all.
Still, the Coalition is calling for an interest rate cap of 36% on cash advance loans, claiming that such high rates trap consumers in a cycle of lending. Yet, in Kentucky rolling over a loan into the next pay period (which typically comes with compounded interest) is illegal. So, there literally is no cycle.
Not only are consumers limited to a maximum of two payday loans at a time, totaling no more than $500 dollars, but a database has even been put in place to make sure that this law is being followed. During the first month of the database being in place over 40% of loan applications were denied. In the first six months 24% fewer loans were issued.
Furthermore, state regulations handcuff a lender’s ability to pursue unpaid loans. Lenders are not allowed to charge late fees or criminally prosecute borrowers who are unable to pay.
The laws that govern the deferred deposit industry in Kentucky are designed to give consumers every protection possible to use high risk, short-term credit products without having to feel the sting if they mismanage their funds. In what other financial industry does the government step in to protect consumers who make poor financial decisions?