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Payday loan laws are complicated
Cash advance lending covered by federal and state laws
The recent closing of payday loan stores in North Carolina points out the problems of trying to regulate short term lending. People find other ways to get it, and sometimes even the federal government gets involved.
Continued below
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Quick cash lending goes on, with or without state laws
The state of North Carolina recently decided to shut down the payday loan business within the state, and the state of Pennsylvania is considering doing the same. Legislators in both states are outraged at the lending practices of these businesses, which lend cash for two week periods of time at interest rates that average about 400% per year. By letting a law regulating the industry lapse and by closing existing stores, the state of North Carolina hopes to make the problem go away.
If only it were that simple. Some 38 states currently regulate some sort of short term lending; the others do not. In states that do not regulate the loans, stores still do business, but obtain their funding from out of state banks, usually located in Delaware, Utah, or South Dakota, where lending restrictions are lax. Loans issued in unregulated states are considered to take place in the states where the bank resides, thus skirting local lending laws. Pennsylvania, for instance, has a law that limits interest rates to some 24% per year. The high default rate on these short term loans would not make such lending profitable at that rate, but at 400% per year, permitted under the laws of South Dakota, such businesses thrive.
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The Federal Deposit Insurance Corp. is responsible for regulating such lending on a federal basis, and they take over in states that have no laws regarding payday lending. Recently, the FDIC has been urging some banks to get out of the business and several banks have already complied. It was hoped that this, combined with the efforts of state governments to close stores, would put an end to high-interest, short term lending.
But there is always another angle for those who seek one, and the new haven for payday lenders is the Internet. Web sites established in states with loose banking laws have set up shop on the World Wide Web and they are offering loans at similar rates of interest to those offered by the cash advance stores. Worse for the borrower, of course, is the fact that they have no idea who they are actually borrowing money from. In fact, in a lot of cases, there is no borrowing at all, as the sites are simply fraudulent. They just take the personal information from their customers and use it for identity theft purposes, leaving the borrowers in worse shape than they were in before.
The states are trying to shut down these online lenders, claiming that by offering loans to instate residents, they are actually doing business within the state. It remains to be seen how these cases will hold up in court, as so far, there have been no significant challenges. Most lenders seem unwilling to fight with the states and are content to do business in the 38 states where their products are legal. All of this just underscores the fundamental problem of this type of lending - consumers want it, and it is very hard to regulate.
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