Nebraska legislature advances new rules for payday loans

Inside Subprime: April 13, 2018

By Kerry Reid

Over a year after it was first proposed, a bill that would add regulations to payday loan operations in Nebraska has advanced – with significant changes – in the Nebraska Legislature.

Nebraska is the only state in the United States that has a unicameral state legislature. It is also officially nonpartisan, and with 49 members – all senators – it is also the smallest state legislative body in the nation. In January of 2017, Sen. Tony Vargas of Omaha introduced LB194, which was designed to change provisions of the state’s Credit Services Organization Act, Delayed Deposit Services Act and the Nebraska Installment Loan Act.

On Friday, April 6, Vargas’ original language was replaced by an amendment from the Banking, Commerce and Insurance Committee, adopted in a vote of 47-0.

This amended version requires full written notice to a borrower, including name of the borrower, transaction date and amount, payment due date and total payment due and the total fees on the transaction, both in actual dollars and as the annual percentage rate, or APR.

Also called a “delayed deposit loan,” payday loans typically target consumers with poor credit, who are caught in short-term cash flow problems. However, payday loan borrowers can find themselves caught in a debt trap as interest rates and associated fees spiral upward and new loans are added to the total. In an article for the Omaha World-Herald published February 23, 2017, reporter Cole Epley recounted the problems of one such borrower. Nebraska resident Glenda Wood testified to the committee that an initial loan of $500 for new tires in 2006 ended up costing an estimated $10,000 by the time the cycle of borrowing (compounded by home repair and medical expenses) ended.

With delayed deposit loans, a borrower submits a personal check for the loan amount, which is then held and cashed by the lender at the end of the loan period – usually 34 days.

The original bill from Vargas would have limited the interest charged on these loans to 36 percent, but that language was eliminated in the amended version, though requirements that lenders avoid misleading advertising, such as promising to erase bad credit, did make it into the amended version.

In an article posted by Nebraska.TV, Vargas said payday lenders in Nebraska currently charge more than 400 percent interest. He said of the amended bill “This doesn’t reform payday lending [as amended], but it increases the information and notifications regarding payday loans given to consumers.”

Other requirements of the amended bill include limiting the total cost of a transaction to $500; allowing borrowers to rescind a transaction before the end of the next business day; and allowing the right to rescind authorization for electronic payments. Additionally, borrowers who are on active military duty or their spouses and dependents cannot be charged fees in excess of those allowed under federal law. Borrowers can also request an extended payment plan once in a 12-month period, and lenders must accept prepayment of a loan before the term without penalty.

Opponents of the original legislation from the payday loan industry cautioned over a year ago, as reported by Epley, that increased restrictions could close operations in areas where consumers depend on these loans for short-term emergency needs. Brad Hill of the Nebraska Financial Services Association noted that after regulatory legislation passed in Colorado in 2010, two-thirds of the storefront payday loan operations went out of business.

The bill now awaits a final vote from the Nebraska Legislature. There have been no reports on where Nebraska Governor Pete Ricketts, a Republican, stands on the amended bill.

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