After the subprime lending crisis almost brought down the U.S. economy, the last thing you would expect to see is anything remotely like predatory lending. (Read More: Inside America's Economic Crisis.)
But predatory lending (or at least the appearance of it) is alive and well in the form of two-week-long payday loans and other short-term installment loans that charge egregiously high interest rates.
A classic example, as I noted in a piece several weeks ago, is World Acceptance, which makes small loans at annual percentage rates as high as 204 percent. That’s a bargain compared with payday loans, which the Consumer Federation of America says have average annual rates of 400 percent. (Read More: Keep an Eye on This 204% Lender)
The lenders insist that they provide a service: Helping the poor and unbankable get emergency cash. Maybe, but how do they still get away with those ridiculously high rates?
Blame it on the states.
Usury laws— regulations governing the way amount of interest that can be charged on a loan — are subject to state regulation, and and they’re across the board.
In a report two years ago, the National Consumer Law Center said only eight jurisdictions have firmly clamped down on predatory lending: Arkansas, Connecticut, the District of Columbia, Maryland, New Jersey, New York, Pennsylvania and Detroit. They all either prohibit some of these loans entirely or have annual interest caps well below 36 percent, which consumer advocates consider reasonable.
Fifteen others, including Delaware, Idaho and Utah, have no caps. Others in the same group, including Missouri, Arizona and Tennessee, might as well have no cap considering that they charge annual rates on payday loans of 1,955 percent, 460 percent and 313 percent, respectively.
Then there are Internet payday lenders, which skirt state laws, and Native American payday lenders, which thanks to sovereign immunity charge whatever they want. (Related:Mo. judge to consider payday lending measure)
“It’s a widespread problem,” says Harvard Law School lecturer Leah Plunkett, who has authored numerous report and studies on predatory lending. “Some states don’t have good statutes or regulations.”
And in states that do, World says in its 10-K that it “believes that virtually all participants in the small-loan consumer finance industry charge at or close to the maximum rates permitted under applicable state laws in those states with interest rate limitations.”
Lenders say they need to charge the high rates to cover the risk of lending to a high-risk market and the cost of doing business. Payday lender Advance America, which has 2,600 locations in 29 states, has gone so far as to say in regulatory filings that if it was forced to charge 36 percent — as has been proposed several times in national legislation — lower rates would likely “eliminate our ability to continue our operations.” (Advance America has since been acquired by Mexico’s Grupo Elektra .)
The good news: Plunkett believes states are incrementally moving toward more regulation of payday lenders.
The bad: Regulators and legislators trying to crack down on predatory lending face an industry that she says “is well-funded, creative, and persistent, frequently coming up with new twists on products that take advantage of the (all but inevitable) legal and regulatory loopholes that remain once an existing product has been addressed.”
Sounds a lot like a game of Whack-a-Mole, except those who can afford to lose the least continue lose the most. And then some.
Questions? Comments? Write to HerbOnTheStreet@cnbc.com
Subscribe to Herb athttp://www.facebook.com/herb.greenberg