States, County Councils Cracking Down On Payday Lending Practices

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Several legislative bodies took steps last week to address payday lending practices.

The Montgomery (Md.) County Council substantially increased the fines for predatory lending, imposing a $500,000 per violation fine, up from $5,000. It also has increased the number of practices that are deemed predatory and prohibits individuals and institutions from engaging in discriminatory lending.

Meanwhile, in Pennsylvania, Secretary of Banking Bill Schenck testified before the state's Senate Banking and Insurance Committee and offered suggestions on ways the state regulator could better regulate payday lenders. There is currently a bill before the legislature sponsored by state Sen. Vince Fumo (D-Philadelphia) that would close a loophole that payday lenders use to get around the current state prohibition against short-term loans with high interest rates.

The Pennsylvania CU Association noted that Keystone State lenders partner with out-of-state banks, which only receive a portion of the loan revenue, and use federal banking regulations to bypass state law. Fumo's bill would require that any lender receiving the majority of the proceeds of the loans be barred from engaging in payday lending.

In Washington State, the state's Department of Financial Institutions charged an unlicensed payday lender for violations of the state lending law. The lender, Expressit, Inc., based in Lacey, Wash., was hit with a fine of $72,800 and ordered to pay restitution to all affected borrowers on interest and fees. The company's owners, Carl and Elaine Ehresman, have been banned from payday lending for five years and are being required to make payment for investigative fees and services.

The regulator found that Expressit Inc. provided payday loans to hundreds of borrowers without a license, failed to provide written agreements or disclosures to borrowers, granted loans and charged fees in excess of the statutes, and refinanced payday loans with proceeds from other loans.

In Illinois, meanwhile, Gov. Rod Blagojevich has directed the state's Department of Financial and Professional Regulations to aggressively enforce the law "from day one," with particular attention to be paid to lenders who try to find ways to circumvent the new law.

"Payday loans are supposed to help working people cover unexpected costs and emergencies. They're not supposed to break their bank accounts," the governor said in a statement.

In 2000 Illinois enacted a law aimed at slowing the increase in short-term payday loans in the state. At the time the law was passed, the average length of a payday loan was 14 to 28 days. At the time it was implemented in 2001, the rules applied only to loans of 30 days or less. Shortly thereafter, payday lenders in the state extended the length of the loans to at least 31 days, thus circumventing the law.

Under the new law signed by Blagojevich, there is a limit on interest that can be charged for each loan at $15.50 per $100; there is a cap on total loan amounts to $1,000 or 25% of a customer's monthly salary, whichever is less; borrowers are prevented from having more than two payday loans at a time; borrowers cannot have payday loans for more than 45 days; after which they must have at least seven days free of loans; there is a new 56-day repayment period with no additional interest charges for borrowers having trouble repaying their loans; borrowers are protected from paying attorney fees and court costs; and a special protection has been extended to members of the military, including a ban on garnishing wages, deferral of collections for deployed troops.

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