North Carolina was the first state to outlaw payday lending. That was in 2001, after a four-year experiment beginning in 1997. Now, a bill has been introduced in the North Carolina Senate to permit payday lending subject to various limitations designed to avoid the abuses that led to the ban.
What is payday lending?
The term “payday lending” generally refers to a transaction in which a borrower writes a check to a lender for a small amount in exchange for cash in the amount of the check, minus a fee to the lender, and the lender promises not to present (cash or deposit) the check until a future date. The lender is aware that the borrower’s account on which the check is drawn does not then have sufficient funds to cover the amount of the check, but agrees because the borrower expects to receive a payroll check or other deposit between the date the check is written and the date it is to be presented for payment, and therefore the account will have sufficient funds at the future date. Proponents argue that payday lending provides important access to credit for individuals who could not otherwise get quick, unsecured credit from a traditional lender.
The problems with payday lending
Payday lending typically involves a “fee” rather than, or in addition to, interest. If the payday loan is not paid off in a very short time period (usually a month or less), it will "roll over" and another fee will be due. Over time, these fees may accumulate. In the course of a year, the fees may be more than the interest payments on a loan would have been at an annual interest rate of over 300 percent. Because of the dangers to irresponsible or vulnerable consumers, a majority of states regulate payday lending, and a small number have banned it entirely, according to the National Association of State Legislatures. Payday lenders point out that high fees are necessary to justify the comparatively high risks of nonpayment.
Bill to reintroduce payday lending in North Carolina
Senate Bill 89 would allow "deferred presentment transactions," which are transactions in which the "lender" accepts a check dated as of actual date it was written but agrees, in writing, to hold the check for a period of time before depositing or cashing the check. The Bill is patterned after the 1997 law that first regulated payday lending, but contains many consumer protection provisions, such as the following:
- The Bill would require payday lenders to be licensed as a "check-cashing business" by the North Carolina Commissioner of Banks.
- The lender would be allowed to charge a fee "to defray operational costs." The fee would be limited to no more than fifteen percent (15%) of the cash advance amount. (However, the fee for cashing a government check would remain capped at 3% or $5.00, as under current law.) The fee would not be deemed interest for purposes of North Carolina law. (I suspect it would under federal law.)
- No other fees or interest would be allowed to be charged or collected.
- The maximum cash advance amount would be five hundred dollars ($500.00).
- Each customer would be provided a written explanation in "clear and understandable language" of (i) the fees charged and (ii) the date on which the check will be deposited or presented for payment.
- A lender would not be allowed to defer presentment of a personal check for more than 35 calendar days after the date that the check is given to the lender.
- A lender and its affiliate would be prohibited from rolling over a deferred presentment transaction. Upon payment in full, the lender would be prohibited from entering into another deferred presentment transaction with the same customer for 24 hours.
- The lender would be required to ask whether the borrower has outstanding checks at other check-cashing businesses and would be forbidden from knowingly entering into a deferred presentment transaction with a customer who did.
- No customer whose check is returned due to insufficient funds will be subject to criminal prosecution unless the customer lied to the lender.
- Pledges of collateral and guaranties would be prohibited.
- A notice must be conspicuously displayed at every place of business of a licensed lender stating the fees charged.
- A licensed lender would be required to file with the NC Commissioner of Banks a current fee schedule.
- Members of the armed forces would be ineligible for the payday loans. (Opponents of payday lending had argued that military members were particularly susceptible to predatory practices and that financial issues created by payday borrowing generated security clearance problems.)