Payday Loans: Attempted Reform

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The information contained herein is for educational purposes only and is not legal advice. You should consult your own attorney or seek specific advice from a legal professional regarding your particular situation.


Payday Loans: Attempted Reform

The second half of the 20th century saw a large push toward payday loan law reform. Enacted in 1968, the Truth In Lending Act (TILA) sought to protect borrowers by requiring creditors to provide standardized written disclosures to consumers about the costs and material terms of the financial product the consumer was borrowing. Therefore, while certain state laws allowed a payday loan provider to charge exorbitant interest rates and fees, the disclosure requirements contained in the Truth In Lending Act required the payday loan provider to inform the borrower of the costs of the credit the lender was offering before the borrower signed the loan documents. [3]

In 1974 the Equal Credit Opportunity Act (ECOA), enacted by Congress and enforced by the Federal Trade Commission, made it unlawful to discriminate against any legal applicant based on race, color, religion, national origin, sex, marital status or age for a credit transaction. The practical effect of ECOA on the payday loan industry is it made it illegal for a payday loan provider to offer more favorable credit terms to one set of borrowers while providing less favorable terms to similarly situated borrowers solely on the basis of a protected class. [4]

In 1978, the unanimous Supreme Court decision in the Marquette Nat’l Bank v. First of Omaha Service Corp. allowed national banks to solicit customers in other states without any recourse. Simultaneously in 1979, as South Dakota rushed through legislation to remove interest rate caps, nationally chartered credit companies flocked to the there in order to maximize corporate profits. Bill Janklow, governor of South Dakota from 1979 to 1987 and from 1994 to 2003, credited the Supreme Court decision, or the Lex Loci Rule, and his state’s “emergency” response to capture the new market for saving the state from bankruptcy. [5]

Shortly thereafter, the market leveled when in 1980 the Depository Institutions Deregulation and Monetary Control Act was signed by President Jimmy Carter. This act forced all banks, even non-federal reserve banks, to abide by the rules of the Federal Reserve, but it also allowed all of those institutions to charge any loan interest rates they chose. Where many banks previously had no interest in smaller loans due to lack of profit, the uncapped interest opportunity soon found banks offering payday loan-type products, in spite of the risks to their reputations. [6]

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