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Payday Lending: The New “Laboratory of the States”

posted by Angie Littwin

Last week, the Oregon Senate voted to cap interest rates on all consumer loans under $50,000 at 30 percent above the federal reserve discount rate, which is currently at 6.25 percent.  The bill is widely expected to pass in the Oregon House of Representatives, and Governor Ted Kulongoski has said he will sign it.  Although it technically applies to all consumer loans, the legislation will mainly affect payday and car title lenders, who claim that it will put the vast majority of them out of business in the state.  Or, as Bill Graves writes in the The Oregonian, the bill “transforms Oregon from one of the most payday friendly states in the nation to one of the most strictly regulated -- with the exception of 10 states that effectively ban payday lending.”

Consumer groups, some religious leaders, food bank operators, and the Oregon AARP have all pressed for the regulation of payday lenders.  While these are groups with which I usually agree on this type of legislation, I do worry about whether and where would-be payday borrowers will obtain cash in emergencies if fewer payday loans are available.   Fortunately, with new laws like Oregon’s, it is finally possible to really study this issue again.  Until recently, it has been impossible to use what Justice Brandeis famously called “the laboratory of the states” to compare how consumers fare in states with different levels of usury restrictions, because, for the most widely-used types of borrowing, all states effectively had the same usury rate – none. 

But a 2001 letter by the Office of the Comptroller of Currency (OCC) gave states the effective ability to regulate interest rates on payday loans.  As more and more states take advantage of their new power, those of us who want to find out what happens to consumers under different payday lending regimes can compare consumers in Oregon to those in Texas to those in Massachusetts to those in Delaware.  Hopefully, what we’ll learn will allow legislatures to fashion better payday lending policies – and better policies for other types of lending as well.

For nonlawyer Credit Slips readers, here’s a little back story on this complex regulatory framework:  Starting in 1978 with the landmark Supreme Court decision Marquette vs. First Omaha Service Corp., and continuing with other decisions, bank lenders – most prominently credit card issuers – have been able to charge the interest rate of the state where they are located instead of being bound by their customers’ state laws.  So if my credit card company is in South Dakota (as many are), it can charge me according to the usury laws of South Dakota (which has none), rather than being stuck with the laws of my state, Massachusetts (which are fairly restrictive).  That is why credit card issuers can charge as much interest as people will pay, without worrying about state usury laws – and why there’s an oddly high chance your credit card company is located in South Dakota. 

Nonbank lenders haven’t had this ability, so states have been able to regulate entities such as pawn shops and rent-to-own stores for the past three decades.  When payday lending took off in the 1990s, these lenders tried to play the credit card issuers’ game by affiliating with bank partners, but in 2000 and 2001, the OCC put a stop to that.  That is why, even though Oregon’s new law theoretically applies to all lenders, payday and car title lenders are the only ones who are upset about it.  The new law will not affect credit cards at all.


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Here in Wisconsin, UW's Consumer Law Litigation Clinic is working on both the positive and negative aspects to the solution. They're vigorously attacking unscrupulous payday lenders through the state consumer protection laws, as well as partnering with legitimate banks to offer a lower interest rate, market based alternative.

Some of the concerns are ensuring that short-term loans don't require a lot of paperwork, and have alternatives to traditional forms of identification, for undocumented workers.

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