Maryland's top financial regulator said yesterday that she is sending a letter to check-cashing outlets across the state warning them that they are breaking the law by making "payday loans."
"What we are telling them is, `You are on notice. You are at risk,' " said Commissioner of Financial Regulation Mary Louise Preis. She said the letters will start going out this week.
Preis was in Annapolis to speak at a legislative hearing on payday lending, a practice in which a consumer typically borrows $100 to $200 for a two-week period and pays fees that amount to an annual interest rate of 400 percent or more. State law limits the rate that can be charged on consumer loans to 33 percent.
Attorney General J. Joseph Curran Jr. told the Senate Finance Committee that his office is investigating a complaint referred by Preis against one payday lender and that he expects to get more referrals.
"There will be action taken if there has been a violation of the consumer protection law," he said.
The comments by Curran and Preis mark the first time the state has moved to crack down on a practice that members of the check-cashing industry say has been going on for several years in Baltimore and across Maryland.
About two weeks ago, the public interest group Baltimoreans United in Leadership Development (BUILD) lodged a complaint with Preis against 10 payday lenders and called on state regulators to enforce Maryland's consumer loan law.
The Senate committee was considering yesterday a bill backed by the payday lending industry that would regulate such businesses, but exempt them from the state's 33 percent interest rate limit. The bill would let payday lenders charge 18 percent on a two-week loan, which amounts to an interest rate of 468 percent annually.
Supporters of the legislation say it isn't fair to consider the costs in terms of annual percentage rates since the loans are for short periods.
Payday lenders say that they provide a needed service for people who occasionally run short of cash between paychecks.
They contend that their fees are justified based on the risks and costs for handling the transactions.
National payday lending chains do not operate in Maryland because of the state's limit on interest rates, but local versions have sprung up at stand-alone stores and in retail outlets such as liquor stores and pawnshops.
The local businesses say they charge fees, not interest, on transactions that involve accepting post-dated checks from customers. Their claim has not been tested in court in Maryland, but Curran's office issued an opinion in November that such transactions are loans subject to the state's 33 percent interest rate limit.
Outside the hearing, Preis expressed frustration that the businesses are continuing to make payday loans at high interest rates despite Curran's opinion.
She said the letter from her office is meant to send a clear message.
The letter notes that only businesses with Maryland consumer loan licenses are permitted to lend money and that the interest rates cannot exceed 33 percent annually.
"You should be aware that violations are subject to criminal penalties," the letter states.
Making consumer loans without a license in Maryland is a misdemeanor, punishable by a fine of up to $5,000 and three years in prison.
Lending money at rates higher than the state's 33 percent cap also is a misdemeanor, punishable by a $500 fine and six months in prison.
Michael Canning, a lobbyist for an association of Maryland check-cashing companies, many of which offer payday loans, said that the threat of criminal penalties is serious and that each member of the association will have to decide how to deal with it.
"It's my understanding that they are operating in an environment they believe is legal," Canning said. "I don't know what their response will be. Each member will do what they believe is best."
The Senate hearing was filled with members of BUILD, its sister organizations from Prince George's and Montgomery counties, and other community organizations.
Sporting large buttons reading "Loans, Not Loan Sharking," they urged lawmakers to reject the industry-backed legislation, which is co-sponsored by state Sens. John C. Astle and James E. DeGrange Sr., both Anne Arundel County Democrats.
Senate meets. 10 a.m. Senate chamber.
House of Delegates meets. 10 a.m. House chamber.
Senate Judicial Proceedings Committee hearing on SB 748, to prohibit job discrimination based on genetic testing. 1 p.m. Senate office building, Room 300.
House Judiciary Committee hearing on several bills to change drunken driving laws. 1 p.m. House office building, Room 120.