Who regulates Payday Loans?

Payday loan stores and online payday loan websites are not like banks, credit unions, and mortgage companies where borrowing is not even contemplated for short-term purposes such as seven to fourteen days. Unless you have a line of credit where you borrow and repay at your leisure, all other loans from financial institutes are much longer in duration. Further, because of the short length of time for which a payday loan is issued, the interest rates are significantly higher than traditional lenders, just to cover the paperwork and other administrative fees. Of course, the underlying purpose of the high interest is profit. The biggest concern, though, is the amount of profit that payday loan stores are permitted to earn. In fact, are the stores legal and are their practices above board? Specifically who regulates payday loans?

In the US, generally speaking, both Congress and the individual states have the authority to outright ban payday loans, control their use, and also limit interest rates and service charges. Although many people are just now learning about alternative financing stores, the concept is not new. Almost five years ago, in September 2006 when payday loan stores focused their business heavily around military bases, congress capped their rates at thirty-six percent, effectively driving some of these locations out of business because they were not interested in the low margins. Further, on October 1, 2007, the Military Lending Act, under the Department of Defense, was put into place and included a ban on roll-overs and refinancing, unless the new rates were favorable to borrowers; a ban on charging penalties for early repayments; and a ban on the use of post-dated checks and pre-authorized debit transactions to secure loans.

But that law only protects individuals in the military and their spouses. What about the rest of the country? Because of the damage that payday loans do, several states have banned them entirely. Examples are Georgia, where short-term loans under $3000 dollars are not permitted, Maryland and North Carolina. Other states have followed suit and it is best to check local government sites, as well as each state's Attorney General site. Further, Attorneys General are a major influence on criminal activities in each state and should be contacted with concerns, especially when a resident of a state in which the activity is banned receives a loan from applying online.

Other states that do permit legal payday loans limit the activities of the businesses. For example, in New Mexico, the Governor along with the Legislature enacted a law in 2007 which makes roll-overs and consolidating payday loans illegal. In fact, the term for a loan cannot be any longer than thirty-five days. Applicants are capped at borrowing no more than twenty-five percent of their monthly incomes, and the service fees, as well as verification fees are capped as well. The bill even includes provisions for customers who cannot repay their loans.

According to the Virginia State Corporation Commission, payday loan providers, among other criteria, must put up a $10,000 bond for each location, and must have available $25,000 of unencumbered liquid assets per location in order to be licensed. The Washington State Department of Financial Institutions recently made changes to its laws regarding payday loans. Presently, customers cannot borrow more than seven hundred dollars or thirty percent of their monthly incomes, whatever is less. Only eight loans are permitted in a twelve month period, and individuals who cannot repay are permitted to request no-fee repayment plans. Residents of Washington who use payday loans will have their information stored in a state-wide database to ensure that other lenders cannot issue new loans.

Finally, the Federal Deposit Insurance Corporation also oversees payday loans. The organization considers this type of consumer borrowing to be part of the sub-prime lending market and sometimes refers to the activity as "deferred deposit advances". The FDIC usually deals with insured depository institutions such as banks and credit unions, but are involved in payday loans because some financial institutes back third party loan operators.

In conclusion, to answer the question, "who regulates payday loans?", there are several regulatory bodies within the US structure, which include the federal government, the FDIC, Congress, Governors of states, State Legislatures, Attorneys General, the Department of Defense, and any other state organizations that control financial institutions and check cashing businesses.