Payday Loans: The Case for Federal Legislation

Within the last decade, payday lending has grown into a multibillion dollar industry by aggressively offering its services to cash-strapped bor-rowers without access to mainstream credit. Consumer advocates insist that stricter state and federal regulations are needed to protect low-income, vulnerable borrowers from questionable payday lending practic-es, which include triple-digit interest rates, exorbitant rollover fees, fre-quent failures to disclose loan terms, and coercive collection practices. Industry representatives, however, support a laissez-faire approach to payday lending, suggesting that regulatory paternalism will unfairly limit consumers’ freedom to purchase payday loans and harm the interests of borrowers that consumer advocates wish to protect.This note argues in favor of enacting a uniform federal payday loan stat-ute to curb the abuses of payday lenders. While some states have passed small loan regulations and usury statutes, federal banking law currently allows payday lenders to partner with national banks to evade state laws. Congress must remedy this situation since the Office of the Comptroller of Currency (OCC) and the United States Supreme Court continue to support the preemption of state usury laws. The author also explains why free market mechanisms and litigation based on unconscionability claims fail to provide adequate consumer protection. Finally, the author pre-sents a framework for a federal payday loan statute and recommends the creation of payday loan alternatives through more stringent enforcement of the Community Reinvestment Act (CRA) and increased funding for In-dividual Development Accounts.

The full text of this Note is available to download as a PDF.