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Payday lenders pose as brokers to evade interest rate caps

July 16, 2010

In recent years, a growing number of states have enacted interest rate caps and other protections to eliminate abusive payday lending practices that trap consumers in long term debt. Payday lenders repeatedly evade these rules, finding new ways to maintain business as usual and continue to offer short-term loans with triple-digit interest rates.

The latest form of subterfuge is one in which the payday lenders position themselves as brokers, seeking licensure under state-level laws designed to regulate credit repair organizations. Under this scheme, payday lenders charge the maximum interest rate allowed on the underlying loan plus an additional "broker" fee, typically ranging from $20 to $25 per $100, resulting in loans with an effective annual percent interest (APR) in excess of 500%.

How Payday Lenders "Operate" as Credit Repair Organizations: A Typical $300 Two-Week Loan Transaction