More than half of U.S. states allow payday loans to operate with few or no restrictions, generating $2.6 billion in fees annually, according to a new report by the Center for Responsible Lending (CRL). These small, easily accessible loans have been the target of growing increasing criticism in recent years because of their high interest rates and fees, which can be particularly heavy burdens for low-income borrowers.
The report found that 29 states have no substantive restrictions on payday loans. Twenty-one states and Washington, D.C., either have significant limits or ban the loans completely; and of those, 16 have interest-rate caps. “The trend at the state level has been moving the market away” from payday loans despite the number of jurisdictions that still allow the practice, according to CRL's Diane Standaert. In Washington state, for example, a set of regulations on small, short-term loans took effect in 2010 -- after which the number of payday borrowers in the state shrank 43 percent.
The CRL report suggested that, outside of federal restrictions, the most effective move states can make against payday loans is to limit the loans' annual rate -- at 36 percent, for example. Rate ceilings, however, are not enough; so states should encourage mainstream alternatives, says Signe-Mary McKernan, an economist and senior fellow with the Urban Institute.