Maryland is on the verge of once more making it harder for payday lenders — especially over the Internet — to offer high-priced loans in the state.
The General Assembly overwhelmingly approved legislation to prevent payday lenders from getting around Maryland's interest rate cap on small consumer loans. Gov. Martin O'Malley is expected to sign it into law, which would kick in Oct. 1.
Payday loans are essentially a two-week cash advance on a paycheck. Lenders charge a fee that, when translated into an annual interest rate, can run more than 400 percent on the short-term loan, consumer advocates say.
Since the mid-1970s, Maryland has had an interest rate cap of 33 percent on consumer loans of $6,000 or less. For the most part, that's kept payday lenders out of the state. And it's earned Maryland a reputation of being tough on lenders that try to exploit vulnerable residents.
So regulators were concerned when they started getting complaints about a year and a half ago that payday lenders, mostly over the Internet, had developed a new business model that attempted to circumvent Maryland's rate cap.
A payday lender would charge the most it could under Maryland law for the short-term loan. But to get the loan, consumers had to go through a broker that charged at least $20 per $100 borrowed. That fee wasn't included in the interest rate on the loan, according to the Center for Responsible Lending.
But if you factored in all the fees, Marylanders were paying a rate of 640 percent or higher, according to state regulators.
The legislation clarifies Maryland law so that all the fees related to payday loans — even those charged by a third-party broker — would be added together and required to come under the rate cap that "has been unambiguous and unchanged for decades," says Mark Kaufman, deputy commissioner of Financial Regulation.
Stephen Altobelli, a spokesman for the Financial Service Centers of America that represents companies that make payday loans, says he hasn't seen the Maryland legislation. But a 33 percent rate cap is too low to make payday loans economical for lenders, he says.
The trade group commissioned a survey by Ernst & Young this year that concluded consumers pay $15.26 for every $100 borrowed, but the lender's profit after its costs was only $1.37 per $100.
And it's a mistake to apply an annual interest rate to a short-term loan, Altobelli says.
The problem, though, is consumers often don't repay the two-week loan once they get their paycheck. Instead, they pay another fee and roll over the loan until the next pay period. And that can go on for months.
"These lenders aren't a bridge to your next paycheck. They aren't even bridges to nowhere. These are bridges to deeper into the hole," says Uriah King, a senior policy associate for the Center for Responsible Lending who testified in support of the legislation. "They don't solve a problem. They create a new one every two weeks."
No one knows that better than Aziza Gary, a business development representative with the Municipal Employees Credit Union in Baltimore.
The Baltimore Sun wrote about Gary's trouble with payday loans and how she got out of it three years ago. Since then, she has been certified as a financial counselor and often advises credit union members against payday loans.
"There is really no alternative to fast money. You just have to make a budget for yourself, or go to a family member or credit union," the 34-year-old says.
Gary says she's glad that Maryland lawmakers are closing a loophole that allows payday lenders to get around the rate cap.
She still receives text messages from payday lenders offering loans. And her father in Florida recently took out a payday loan against his pension check at a rate of 625 percent because he was short on cash.
"I told him when his check comes in the first of the month, make sure he pays off that loan and not deal with them again," she says.