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Payday-loan rules provide break

July 2, 2006 - Detroit, Michigan

Driving north on Woodward Avenue through Royal Oak the other day, I spotted a window sign proclaiming good deals on those quick-fix, high-cost, payday loans.

"New lower fees," read the sign at the Check 'n Go.

Well, that's one way to look at a new mandate to regulate the state's payday lending industry. The new law -- which went into effect June 1 -- requires the price cuts.

So, signs or not, all payday lenders are required to charge less than they used to when you take out a payday loan.

Lenders' limits

Here are some of the new rules:

Lenders in Michigan cannot charge more than $76 for a $600 payday loan. They can slap on smaller fees if they want, but will they? It's pretty doubtful.

"It's hard to go any lower, to be honest with you, than what the state set," said John Rabenold, a spokesman for Check 'n Go, based outside Cincinnati. Check 'n Go, owned by CNG Financial Corp., operates more than 1,300 stores in the United States. With 111 stores at year-end in Michigan, including the Upper Peninsula, Check 'n Go is the largest payday lender in Michigan.

There are limits on smaller loans, too. The most you can be charged in Michigan for a $100 payday loan is $15. And the most on a $200 loan is $29.

No loan can be for more than $600.

A consumer now can have only two payday loans outstanding at once. But you can have only one payday loan per lender.

These changes are good news for cash-strapped consumers. When I wrote about this subject last July, after a payday lending bill was passed by the state House and on its way to the Senate, I found consumers who were paying sizable sums.

One Detroit man was charged $90 on a $500 payday loan -- a loan that had to be repaid in two weeks. Now, under the new rules, the maximum charge on a $500 payday loan is $65.

Services growing

Sure, consumers pay an absurd price to take out a payday loan -- and it still makes little financial sense to do so even after the new limits in Michigan.

But fast-cash lenders are definitely gaining ground, as many people juggle their bills, try to avoid late fees and cope with higher heating bills or cuts in overtime pay. Payday lending stores are popping up in every part of town, including strip malls in several middle-class suburbs.

Borrowers who use such stores typically must have a checking account, a paycheck, proof of current address and a driver's license or state identification.

To get a payday loan, a consumer presents a check for the amount to be borrowed plus the fee -- say a $115 check for a $100 loan. The consumer gets the $100 and an agreement that his or her check will be held for a period between seven and 31 days before it will be cashed.

Federal Reserve Chairman Ben S. Bernanke noted in a speech last month that consumers had rarely heard of payday lending outlets a decade ago.

Now, he noted, there are more than 10,000 payday lending stores nationwide.

Michigan now requires payday lenders to be licensed. State regulators have issued 573 licenses to date.

And more U.S. households are borrowing from lenders other than traditional banks. The most recent data from the Survey of Consumers Finances, sponsored by the Federal Reserve Board, showed that 25% of households had a loan from a finance company in 2004 -- up from 13% in 1992.

Yet up until last month, Michigan was one of a small group of states that didn't regulate payday lenders. So consumers definitely needed some protections.

Thanks to the changes in Michigan's law, payday lending stores are required to provide disclosures to consumers. And you can complain if you're charged more than the new limits. Consumers should first complain to the lender as soon as they see something wrong.

For each violation, a payday lender must return the check and the cash received under the agreement. The lender also would have to pay five times the amount of the fee charged -- but not less than $15 or more than the face amount of the check.

It's always good to read the signs on the windows to keep up with the deals, but it's even better to know how those signs got there in the first place.

News Source

Detroit Free Press, Susan Tompor, Free Press Columnist

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