Claiming they are protecting consumers, lawmakers in Nevada , New Mexico and Oregon recently have clamped down on the short-term, high-interest 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 a range of financial services providers. 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 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, payday 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 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 payday 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.
"This will be remembered as a landmark session for consumer protection," Kulongoski said in a statement.
But industry spokesman Schlein said the rate cap will bankrupt Oregon 's short-term lenders and leave customers without options for accessing quick cash. "The customers don't complain," he said.
In Nevada , lawmakers closed a loophole they said was being used by some businesses to avoid restrictions imposed by a 2005 state law. Several payday lenders had reclassified themselves as "installment lenders" and continued charging customers huge annual interest rates, according to proponents of the bill, which also carries specific protections for military personnel and their families.
New Mexico 's payday law imposes several new limits on payday lenders. It bans renewals and rollovers of payday loans, requires fixed payment plans for those who cannot pay off debts on time and introduces a waiting period before some customers can ask for another loan. It also requires lenders to offer information in Spanish.
But Fox, of the Consumer Federation of America, said the lack of a double-digit cap on interest rates in New Mexico means the law won't offer consumers real protection. "The fact that it may have been a bit worse in New Mexico without that law doesn't make it beneficial to the state's borrowers," she said.
Even Richardson stressed the law was a compromise effort, underscoring the fierce political debates that have accompanied payday lending in statehouses across the nation.