Regulators want to close loophole that allows 700% interest rates 

Posted: 7:43 pm Wed, February 3, 2010
By Nicholas Sohr
Daily Record Business Writer

ANNAPOLIS — State financial regulators pressed lawmakers on Wednesday to tighten payday lending rules to rein in the cost of short-term loans.

The bill would close what Department of Labor, Licensing and Regulation officials say is a loophole that lenders have taken advantage of to charge the equivalent of up to 700 percent annual interest on small, week-to-week loans.

“Payday lending looks for these crevices, ways around the law,” state Commissioner of Financial Regulation Sarah Bloom Raskin said at a House subcommittee meeting.

State law sets a 33 percent cap on the annual interest rate on loans up to $6,000. Recently, Raskin said, credit services companies have added brokers to the equation. The brokers charge their own fees, often between $20 and $25 per $100 of loan principal.

“We take the position that this current evasion is a violation of the law,” Raskin said.

The lenders, however, say the practice is not only well within the law, but is the only way payday loans can be made because of the narrow window to collect interest.

“No payday loans are made at 33 percent [annual interest] in the state of Maryland,” said Sarah Cutrona, general counsel for ThinkCash, a Texas-based credit services firm that runs the lending Web site paydayone.com. “Lenders do not make money on $1.60 on a $200 loan due in two weeks.”

Most delegates directed their toughest questions to the credit servicing companies in attendance.

Del. Sally Y. Jameson, D-Charles, said her subcommittee would meet again to discuss changes to the bill before bringing it before the full House Economic Matters Committee, a process she said would require some careful balancing.

“We don’t want to do anything through the regulatory process that would [deter] companies from doing business in the state of Maryland,” she said. “But, we need to make sure that we do everything we can to protect Maryland consumers.”

HB 79, which was crafted by Raskin’s office, would require the total of the fees and interest charged on the small, short-term loans to come in below the 33 percent annual interest cap. It would codify what Raskin and DLLR already believe to be the law and give the department more clout in cracking down on lenders that violate the cap.

Raskin said the issue bubbled up in the form of complaints filed against lenders in the last 12 months.

“States are just beginning to look at [the practice] because it’s so new,” said Assistant Attorney General Christopher Young.

Without the bill, legal action against high fees “will be contested,” Raskin said. “There will be real pushback from lenders.”

Credit services companies indicated as much. Andy LaPointe, a senior manager at Enova Financial Holdings LLC, a Chicago company that runs cashnetusa.com, said the industry “believes there’s no cap” on the fees they can charge.

Without the fees, Cutrona and LaPointe said domestic payday lenders would be forced out of the state, paving the way for unregulated companies to control a larger share of the market.

LaPointe said his company made about 50,000 loans in the last 12 months at an average of $575 and a term of 15 days. He said at most, his company has 23 percent of the market in the state.

“The unlicensed, off-shore lenders who are in Grenada and Costa Rica will still be making loans,” Cutrona said.

Raskin said while her goal is not to put the domestic lenders out of business, the department is prepared to deal with the illegal lenders operating from within the country or outside its borders.

“We are churning out cease and desist orders at a very hefty rate,” Raskin said.