The payday loan industry is governed by consumer protection guidelines aimed at regulating cash advance practices and promoting responsible lending. Its members must comply with state and federal laws and regulations relating to payday advance loans. What follows is an overview of the legal framework within which this personal loan industry presently operates:
1) Full disclosure:
Cash advance companies must comply not only with disclosure provisions of the state out of which they are operating but also with federal disclosure requirements such as the Federal Truth in Lending Act (TILA). TILA is a federal consumer protection law requiring banks to provide customers with accurate disclosures, such as the finance charge, the annual percentage rate of interest (APR) and a description of the collateral, before entering into the credit transaction. Creditors must also abide by the Federal Reserve's Regulation Z, which requires them to provide a detailed description of the cost and terms of their consumer loan transactions. A payday advance lender that does not disclose the APRs and finance charges in an accurate and timely manner risks having to pay restitution to the borrower in the amount of $1000 or twice the finance charge, whichever is lower.
An APR disclosure will typically read as follows:
"The APR will not change depending on your loan's term. However, for borrowers who pay later than the due date, interest will accrue at a daily rate until the loan is paid in full. The lender will discount finance charges for early payment."
Pursuant to Regulation Z and TILA, cash advance creditors that advertise their loan products must do so by setting forth only those terms that in fact are or will be offered by the lender. For instance, an ad stating a rate of finance fees must label the rate as an APR and employ that term. Similarly, an advertisement must state if an APR may be raised after the initial origination date.
Therefore, an agreement between a check advance store and a consumer must spell out the terms of the transaction, disclosing the amount of the service charge as a dollar figure and as an annual percentage rate.
The payday cash loan industry is subject to other disclosure requirements. First, under TILA, a lender must inform a customer who asks it to hold a post-dated check that he/she presented to the former, that the check constitutes a security interest. Secondly, all disclosures must be conspicuous and avoid misleading or confusing the borrower. For example, the Seventh Circuit held that a cash advance store's act of covering the TILA disclosure with a receipt was illegal. A third disclosure requirement can best be illustrated by way of an example: If a quick payday loan store lends $600 to a borrower, but keeps $100, the loan is in reality for $500, and the lender must disclose the $100 as a finance charge.
2) Compliance:
Cash advance lenders must engage in fair lending in accordance with federal and state consumer protection laws. They are prohibited from charging payday cash loan rates that are not permitted under the law. In addition to complying with the Truth in Lending Act, payday advance lenders must conform to the provisions of the Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Federal Trade Commission Act, the Electronic Funds Transfer Act, the Fair Debt Collection Practices Act, and relevant provisions of state deceptive practices and usury laws.
3) Truthful advertising:
A payday advance lender is prohibited from making false, deceptive or misleading statements regarding terms, rates or conditions when advertising for its services. Rather, the creditor will encourage solely the responsible utilization of the short term loan service.
4) Encouragement of consumer responsibility:
A check cash advance lender should educate customers on the intended purpose of the fast payday loan service and notify them of the availability of credit counseling agencies. It will inform them that short term personal loans are not aimed at resolving complex financial difficulties. Typically, a payday advance lender will place such notices on all of its promotional material, such as direct mail, in-store marketing publications, and print/radio/television/online advertising.
5) Rollovers:
Rollovers are prohibited in most states, which do not authorize automatic renewals. Cash advance lenders must not permit consumers to rollover a loan (extend an existing advance by paying a fee) if state law does not explicitly sanction this practice. Where it is authorized, the payday advance lender must restrict rollovers to four or to the state maximum, whichever is lower.
6) Appropriate collection practices (for lenders):
A cash advance lender must act fairly, lawfully, and professionally in collecting delinquent accounts. It is prohibited from employing intimidation or threats or engaging in harassment to collect payments. The Fair Debt Collection Practices Act (FDCPA) contains collection restrictions that provide guidance for payday advance lenders.
7) Support balanced legislation:
A cash advance lender should collaborate with regulators and state lawmakers to continue pushing for responsible payday legislation that incorporates the CFSA's best practices.
8) Enforcement:
A short term loan creditor should engage in auto-policing of the payday loan industry. It can do so by reporting violations to the Community Financial Services Association of America (CFSA), the national organization committed to encouraging responsible regulation of the industry. The CFSA will conduct an investigation and proceed accordingly. Each cash advance loan store should accept to post a toll-free number serving as a consumer hotline.
9) No prosecution:
A cash advance creditor shall refrain from threatening or bringing criminal proceedings against a client if the latter's check, offered as loan security, was dishonored, or if the consumer's account is delinquent.
10) Relationships with financial institutions:
A check cash advance creditor may advertise and service payday loans issued by a federally-guaranteed financial institution, if the latter fulfills the following criteria:
- Establishes its own credit-based factors;
- Satisfies relevant state disclosure requirements when consistent with federal law;
- Authorizes and finances each cash advance;
- Stays within the state limits on the number of rollovers;
- Allows the payday lender to buy no more than a minimum number of the short term loans, or any other quantity which would conform with reasonableness and safety assessments by state or federal banking regulators;
- Acts in conformity to the CFSA's best practices; and
- Meets the payday advance regulations and guidelines established by the financial institution's state or federal regulator.