How can we stop abusive payday lending practices?
Our sister states of North Carolina and Georgia addressed the problem of
payday lending by banning this industry. Although this is the best
solution to ensure the problems stop, short of this there are
modifications that should be made to South Carolina’s Payday Lending
laws that will help consumers.
House Bill 3294 will make a number of modifications:
1) Limit the interest rate pay day lenders can charge customers, by
capping the interest rate that can be charged on a Pay Day Loan to 36%
APR and allow for a $5.00 administrative fee (similar to what was
enacted by the Federal Gov. to protect military personnel and their
2) Ban internet payday lending by lenders not licensed in SC, making it
an unfair trade practice and the lender’s contract unenforceable in South
3) Limit the number of pay day loans that a company can make to a
consumer to one at any given time;
4) Ban one sided mandatory arbitration clauses and allow for penalties
when a lender violates the prohibitions of the law.
Senate Bill 398
1) Repeal law permitting deferred presentment;
2) Make it a felony to make this type of loan
How does payday lending work?
Pay Day loans are made to individuals who have a checking
account. Currently, a consumer can borrow up to $300.00, by writing a
check to the lender. The lender will then hold this check from two weeks
to 30 days, usually the consumer’s next pay day. The charge can be up
to $15.00 for every $100.00 borrowed. This charge translates into
interest rates of around400%. Loans cannot be renewed (extended) or
“flipped”. But this does not mean that lenders cannot make repeated pay
day loans. Once a borrower has paid off one loan with a lender, he or
she can then immediately take out another. Unfortunately, many
consumers end up taking out loans from more than one lender at a time.
Consumers have reported taking out as many as 19 loans at the same
time, although the average is usually five or six. This happens when
consumers use one pay day loan to pay off an existing loan that is
coming due. The consumer ends up taking the same $300.00 and using
it to pay off the next lender. He finds himself in terrible debt owing
multiple loans with no way to ultimately pay all the loans in full.
Why is this a problem in SC?
In 2000 licensed pay day lenders wrote 2,659,550 contracts that
resulted in approximately $91,021,340.00 in charges. During fiscal year
2005, 4,175, 711 loans were made with charges of approximately
$146,554,487. In a four year period 17,797,365 payday loans were
made in South Carolina paying out approximately $620,675,487.00 in
fees. Since we know that not all South Carolinians use this type of
lending, we can assume that many consumers get caught in a web of
numerous loans to keep themselves afloat. Although $45.00 does not
sound like a huge charge for a loan, if you are forced to pay this amount
to three or four lenders, twice a month, it can get quite costly. Ending the
constant rewriting of contracts and limiting the total number of loans to
any consumer at one time could help many of the financial problems we
see these loans cause.
Payday lenders and the Military
Targeting men and women in the military as well as their families
is a common place problem with fringe lenders and pay day lenders are
no exception. An analysis of pay day lenders in SC demonstrates pay day
lenders are more abundant in areas with military personnel. (see
attached map of locations) Payday lenders are targeting young
unsophisticated borrowers who have a low, but steady income. In
addition, these lenders understand the pressure that they can put on
military personnel who have debt problems in an effort to squeeze out
one more loan. Consumer counselors at Fort Jackson have reported
seeing 20-25 individuals each month who have problems with pay day
loans. Over half have more than one outstanding pay day loan.
The industry has developed best practices to allegedly address
abusive lending, but these standards do nothing to limit the real
practices of payday lenders. The industry has set a standard that a
lender should limit the number of times it renews a loan to any
individual to four. This is the industry’s solution to ending the spiraling
debt cycle. This best practice is disingenuous as it does not apply to
loans made in South Carolina because our law does not allow renewals
or extensions of loans. Once a borrower pays off one contract he is
permitted to immediately enter into a new contract as this is not a
renewal under the law. In addition, under South Carolina law a
consumer may have multiple loans with the same company because each
individual location is granted a separate license.
The Federal Government found that Payday Lending undermines
military security. To address this problem Congress is prohibiting
lenders from charging military personnel or their dependents more than
36% APR. This cap becomes effective October 2007.
SC Appleseed Legal Justice Center, January 2007