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Payday Loan Usury Laws: A Safeguard against the Revolving Cycle of Debt


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By: Yara Zakharia, Esq.

Every year, more than five million American families living paycheck to paycheck fall victim to predatory payday lending. A payday loan is a cash advance for an amount not greater than $300 on a borrower's next paycheck -- usually short-term, high-interest loans at 300% or more. In some states, it is easier to find a payday loan company than a fast-food chain. Usury laws, considered the first consumer laws, curb payday loan abuses. They protect consumers from predatory lenders, also known as loan sharks, charging exorbitant interest rates for a short-term payday loan.

Pursuant to the federal Truth in Lending Act (TILA), a payday loan company must disclose the cost of their loans; as a finance charge (a fee) and as an annual percentage rate (APR). Under the Truth in Lending Act, banks acting as consumer lenders must ensure that accurate disclosures are provided to clients.

Payday loans are regulated in 37 states through the mechanism of usury laws. These regulations specify the maximum interest rate at which loans can be made and define permissible lending terms. The majority of states have usury laws, including "special usury laws", such as small loan acts. In about one-third of the states, a payday loan company is subject to small loan and criminal usury laws. For instance, New York payday loan lenders must comply with its criminal usury cap of 25% annual interest. Twelve states and two territories have usury laws prohibiting a payday loan at a triple-digit interest rate.

In twenty states, the Virgin Islands and Puerto Rico, a payday loan company is required to abide by the state’s small loan or criminal usury laws which fix interest rate caps at up to 36% per year. These usury laws often contain extensive provisions setting forth the maximum and/or minimum term, the maximum interest rate and permissible charges, the maximum loan amount, penalties for charging unlawful interest and for other violations, required contract provisions, licensing requirements, and prohibited contract provisions. By contrast, in 19 states and the District of Columbia, a payday loan company is exempt from usury laws or cash advance interest caps.

A payday loan company that charges in excess of the legal interest rate will not be allowed to sue to recover any debt due to the illegality of the interest rate.

State usury laws are inapplicable to banks that label themselves with the words "national". Nevertheless, although such institutions are allowed to set interest rates a few points higher than the Federal Reserve Discount Rate, a criminal limit fixed by Congress for interest rates does exist at the federal level. This rate is twice the amount of the particular state's usury limit. A payday company often circumvents these regulations by teaming up with banks headquartered in other states, such as Delaware.

In conclusion, predatory lending is costing families billions of dollars each year. Usury laws are aimed at cracking down on payday lenders gouging consumers with a prohibitively-priced loan.


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