You asked for information on “payday” loans.

SUMMARY

“Payday” loans, also called “deferred deposits,” are very short-term loans, usually for a few hundred dollars at fees that, when calculated as annual interest rates, can sometimes be as high as 700%. They are often made in other states by check cashers or other entities licensed as “payday” lenders or “deferred deposit services.” The lender accepts the borrower's personal check for the amount needed plus an extra fee and gives the borrower cash, but agrees not to deposit the check until the borrower's next paycheck arrives at the bank. The loans can be renewed for additional periods.

Connecticut statute does not authorize such loans. Connecticut's usury limit for entities that are not banks or otherwise exempt is 12% annually, which appears to prevent such loans here. In addition, to make small consumer loans at a rate higher than 12%, nonbank lenders would have to be licensed under the state's small loan law, which has higher interest limits, but not as high as the usual rates on payday loans. Connecticut statute also allows and licenses check cashers, but has no provisions for them to make loans or defer deposits. State regulations limit their check cashing fees to a maximum of 2% of the check's face amount.

At least 23 states specifically allow payday loans. In eight states there is no statutory authority for them, but the loans are allowed because the state has no usury limit. Some states with restrictive usury limits have defined the extra fee as a transaction fee, rather than interest, and exempted it from their usury limits. Nineteen states, including Connecticut, in effect prohibit payday loans through their small loan laws or check casher laws.

PAYDAY LOANS

These are small, very short-term loans often made by check cashing or similar businesses in other states. The amount of the loan is usually a few hundred dollars, the term of the loan is often only a few weeks but can be renewed, and the effective annual interest rate can reach 400% to 700% depending on how often the loan is renewed for additional fees. The loans are mostly of interest to lower-income people who have trouble living from paycheck to paycheck, people with bad or no credit, or those who have used up all the available credit on their credit cards.

The customer normally goes to a check casher to obtain such a loan and writes a postdated personal check on his own bank account, for the loan amount and an additional fee. The fee is usually a percentage of the check's face value or a fee per $100 borrowed. The check casher gives the customer the cash amount and keeps the check until the customer's next paycheck is deposited in the account. Then the check casher deposits the customer's personal check and receives his money plus the fee (which is in effect interest). The procedure is also sometimes called a deferred deposit.

CONNECTICUT USURY LAW

One of the barriers to pay day loans in Connecticut is the law establishing the 12% general usury limit. This limit applies to anyone making consumer loans in the state who is not specifically exempted in the statutes. While there are many exemptions to the usury limit, including any loans made by banks, certain business loans, and higher limits for consumer small loan companies, retail installment contracts, pawnbrokers, certain nonbank automobile loans, and others, it appears that the limit would apply to payday lenders (CGS § 37-4, § 37-9). However, in some states payday lenders have allied themselves with national banks to make the loans in spite of usury limits. In others, the fees do not constitute interest for usury purposes.

CONNECTICUT SMALL LOAN LAW

No one other than a bank, credit union, or pawnbroker can make small consumer loans up to $15,000 in Connecticut at a rate higher than 12% a year, unless they become licensed with the Banking Department as a small loan lender. If they become licensed, they can charge 19.8% on open-end loans. For closed-end loans, they can charge (1) $17 per $100 for the first $600 and $11 per $100 for the remainder of loans up to $1,800 or any loan that is unsecured or secured only by credit life insurance and (2) $11 per $100 on secured loans over $1,800. The actual annual percentage rate on these closed-end loans varies depending on the length of the loan but is usually around 21% to 22%, still much lower than the payday loans (CGS § 36a-563, § 6a-565).

Another potential barrier to payday loans in Connecticut is the small loan law's prohibition of “assignment of wages” (CGS § 36a-568). While there is technically no formal assignment of actual wages, opponents of payday loans might argue that this is in effect what is happening because the loans are made with the expectation that the next paycheck will be deposited to cover the loan.

CONNECTICUT CHECK CASHER LAW

Connecticut statute licenses check cashing businesses, but there is no authorization for them to make payday loans or offer deferred deposit services. Regulations allow them to charge at most a 2% fee for cashing a check (CGS § 36a-580 to 589, Conn. Agencies Reg. § 36a-585-1 and 36a-588-1 to 4).

OTHER STATES

At least 23 states and the District of Columbia have statutes that specifically allow payday loans or deferred deposit services, according to the recent enclosed report done by the Consumer Federation of America (CFA) and the State Public Interest Research Groups, Show Me the Money! A Survey of Payday Lenders and Review of Payday Lender Lobbying in State Legislatures, February 2000. These include Arkansas, California, Colorado, Florida, Hawaii, Iowa, Kansas, Kentucky, Louisiana, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, North Carolina, Ohio, Oklahoma, South Carolina, Tennessee, Utah, Washington and Wyoming. Another eight states, in effect, implicitly allow payday loans because they do not cap interest rates on small consumer loans. These are Delaware, Idaho, Illinois, New Hampshire, New Mexico, Oregon, South Dakota, and Wisconsin.

The study lists 19 states, including Connecticut, as prohibiting pay-day loans through their small loan laws or check casher laws. The other states are Alabama, Alaska, Arizona, Arkansas, Georgia, Indiana, Maine, Maryland, Massachusetts, Michigan, New Jersey, New York, North Dakota, Pennsylvania, Rhode Island, Texas, Vermont, Virginia, and West Virginia. The report is available at

http://www.pirg.org/reports/consumer/payday/showmethemoneyfinal.PDF

The report cites a 1999 CFA study ”Safe Harbor for Usury: Recent Developments in Payday Lending” at

http://www.consumerfed.org/safeharbor.pdf.

A 1998 CFA study is also available at

http://www.stateandlocal.org/loanshar.html

Information from the lenders' viewpoint is available on the National Association of Check Cashers website at

http://www.nacca.org/defdep.htm

HN:ts