Payday Loans Laws Protecting Montana Borrowers 2002

Authors: Marsha A. Goetting MSU Extension Family Economics Specialist Britta A. Schernthanner FCS Intern, MSU

MSU Extension MontGuide MT200102HR bs/mt html

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Payday loan Industry Emerged in response to consumer demand for small loans for short periods of timeEmerged in response to consumer demand for small loans for short periods of time

Small Loans Typically not made by traditional lendersTypically not made by traditional lenders $50 to $300 $50 to $300

Common Loan Names Cash Advance Cash Advance Payday Payday Post dated Check Post dated Check Delayed Deposit Check Delayed Deposit Check

Payday Lenders MT Definition MT Definition Business that provides loans from $50 to $300 for up to 31 days Business that provides loans from $50 to $300 for up to 31 days

Montana Division of Banking & Financial Institutions Issues annual licenses Issues annual licenses Conducts annual examinations Conducts annual examinations

Montana Licensed Payday Lenders 97 January of 2004

How does a payday loan work? Two ways are typical Two ways are typical

Method 1 Lender loans money to borrowerLender loans money to borrower Lender accepts check for loan amount plus feesLender accepts check for loan amount plus fees

Method 1 (cont’d) Borrower dates check on day written Borrower dates check on day written Lender holds check for agreed number of days of the loan Lender holds check for agreed number of days of the loan

Payday Loan Example: Mary has too much month left at the end of the money!Mary has too much month left at the end of the money! Borrows $100 Borrows $100

Mary Borrows $100 Writes check for $113 Writes check for $113 $100 plus $13 fee$100 plus $13 fee Dates check on day written, January 22Dates check on day written, January 22

Mary’s Payday Loan 7 day loan 7 day loan Payment DuePayment Due January 28January 28 Lender deposits check for $113 Lender deposits check for $113

Method 2 Lender loans money Lender loans money Lender accepts post dated check for loan amount plus fees Lender accepts post dated check for loan amount plus fees

Method 2 (con’d) Lender holds check until date written on itLender holds check until date written on it Borrower can buy back check with cash Borrower can buy back check with cash

Payday Loan Example: Mike has too much month left at the end of the money!!!! Mike has too much month left at the end of the money!!!!

Mike Borrows $100 September 10 September 10 writes check for $118writes check for $118 Post dates check Post dates check September 21September 21

Mike’s Loan 12 days later 12 days later Lender deposits check for $118 Lender deposits check for $118

Montana Deferred Deposit Loan Act October 1, 1999

How much money may be borrowed? Maximum Maximum $300 $300 Plus fees Plus fees

How much money may be borrowed? Minimum Minimum $50 $50 Plus fees Plus fees

Costs for loans Finance Charges Finance Charges Fees Fees

Montana Fee Cap Can’t exceed 25% of face value of check Can’t exceed 25% of face value of check

Example Fees on $100 4 days = 4 days = 10 days = 10 days = 15 days = 15 days = 20 days = 20 days = 30 days = 30 days = $10.00 $16.00 $22.00 $33.24 $33.25

Federal Law Payday lenders must disclose finance charges (fees) as Payday lenders must disclose finance charges (fees) as Annual Percentage Rates APRsAnnual Percentage Rates APRs

Shop Around Compare Annual Percentage Rates Compare Annual Percentage Rates APRsAPRs

Typical Loan APRs 10% to 18% 10% to 18% Banks, Savings & Loans, Credit Unions Banks, Savings & Loans, Credit Unions

Typical Loan APRs 16 to 21%16 to 21% Credit Card Cash Advances Credit Card Cash Advances

Payday Loans: Typical APRs 4 days = 4 days = 10 days = 10 days = 15 days = 15 days = 20 days = 20 days = 30 days = 30 days = 913% 584% 535% 607% 406%

Table 1: Page 5 Examples Examples Fee Amounts Fee Amounts APRs, & APRs, & Fee Rates per $100 Fee Rates per $100

Table 1: Page 5 Fees, APR, Fee Rates per $100

Montana Deferred Deposit Loan Act Additional Rules

Payday loan cannot exceed 25% of monthly net income of borrower 25% of monthly net income of borrower

Example 1 $1,110 $1,110 x.25 x.25 $ 275 limit on loan $ 275 limit on loan

Example 2 $1,500 $1,500 x.25 x.25 $ 375 but loan limit is $300 $ 375 but loan limit is $300

Borrower cannot Have more than 2 loans outstanding at any one time with single payday lender Have more than 2 loans outstanding at any one time with single payday lender

Limitation Total of two loans with same lender can’t exceed $300 limit Total of two loans with same lender can’t exceed $300 limit

Can loan be extended ? NO Lenders prohibited from refinancing a payday loan with proceeds of another payday loan to same borrower Lenders prohibited from refinancing a payday loan with proceeds of another payday loan to same borrower

What does lender require from borrower? Photo ID Photo ID Checking Account Checking Account Payroll Stub Payroll Stub Physical Address Physical Address

What does lender have to provide to borrower?

Two items 1. Pamphlet 2.Written Loan agreement

Pamphlet Explains borrower’s rights & responsibilities for payday loan Explains borrower’s rights & responsibilities for payday loan

Pamphlet Telephone number for Montana Department of CommerceTelephone number for Montana Department of Commerce

Pamphlet Informs borrower that MT Dept of Commerce provides info about lender’s licenseInforms borrower that MT Dept of Commerce provides info about lender’s license

What does lender have to provide to borrower? Two items Two items Pamphlet Pamphlet Written Loan agreementWritten Loan agreement

Requirements Written Loan agreement Written Loan agreement

Loan Agreement Name, address & phone number of lenderName, address & phone number of lender

Loan Agreement Means of identifying employee who signs agreement Means of identifying employee who signs agreement

Loan Agreement List of fees & interest charges to be paid by borrower List of fees & interest charges to be paid by borrower

Loan Agreement Description of borrower’s payment obligations Description of borrower’s payment obligations

Statement “You cannot be prosecuted in criminal court for collection of this loan” “You cannot be prosecuted in criminal court for collection of this loan”

But…..If loan not paid Lender can sue in Civil Court Lender can sue in Civil Court

Civil Court Can assess borrower Can assess borrower Court fees Court fees Attorney’s fees Attorney’s fees

Civil Court Garnish borrower’s wages Garnish borrower’s wages

Civil Court Place lien on home or other asset Place lien on home or other asset

Alternatives to Payday Loans

Alternatives Check cost of loan from bank, credit union, or savings & loan institution Check cost of loan from bank, credit union, or savings & loan institution

Alternatives Ask employer for advance on paycheck Ask employer for advance on paycheck

Alternatives Ask family or friends for a short-term loan Ask family or friends for a short-term loan

Alternatives Is APR on credit card cash advance lower than APR on a payday loan? Is APR on credit card cash advance lower than APR on a payday loan?

Alternatives Use credit card to make purchases & pay total when dueUse credit card to make purchases & pay total when due

Alternatives Use credit card to make purchases & make monthly payments Use credit card to make purchases & make monthly payments

Alternatives Ask creditors for more time to pay bills Ask creditors for more time to pay bills

Alternatives Obtain overdraft protection on checking accountObtain overdraft protection on checking account

How to avoid needing a Payday loan? Better management of money Better management of money

Track Income & Expenses Use info to develop spending plan

Establish Emergency Fund Use these funds instead of payday loan Use these funds instead of payday loan

Avoid these rates 4 days = 4 days = 10 days = 10 days = 15 days = 15 days = 20 days = 20 days = 30 days = 30 days = 913% 584% 535% 607% 406%

Payday Loans Laws Protecting Montana Borrowers 2002