States have historically taken the lead through their police powers to ensure that consumers are not subject to abusive lending practices. This Scorecard assesses how well states are exercising their authority by examining ve elements of state laws: 1
The statutory maximum annual percent- age rate (APR) for four typical small dollar loan products:
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Payday loan; Auto-title loan. Six-month installment loan; One-year installment loan.
Whether the APRs for these four prod- ucts are limited by the state’s criminal usury cap.2
For each of these four products, the Score- card awards the state a passing grade if state law limits the maximum annual percentage
1 Legislative developments through April 15, 2010, are reected in this Scorecard, unless otherwise indicated.
2 Some states have enacted both civil and criminal usury laws. Civil usury laws were adopted in the original colonies, and this practice continued among the states after independence. See National Consumer Law Center, The Cost of Credit: Regulation, Preemp- tion, and Industry Abuses § 2.2.2 (4th ed. 2009). Crim- inal usury laws were designed to complement civil laws and create criminal liability when a lender’s rate or fees exceeded a rate that is often in excess of the general usury law of the state. Some criminal usury laws also punish extortionate behavior and threats of physical injury—behaviors that are now associated with “loan-sharking.” Thus, criminal usury laws punish conduct that is more reprehensible, violent, or intentional.
rate (APR)3 to 36% or less, and a failing grade if state law allows an APR greater than 36%. The 36% annual interest rate benchmark has historically been common in state law,4 and a 36% APR is the cap that Congress established for certain loan products extended to active- duty service members.
This updated Scorecard (2010) follows up on the original Scorecard (2008), which was re- leased by the National Consumer Law Center and Consumer Federation of America in August 2008.5 Since that date, the most signicant
3 The Scorecard uses the Truth in Lending Act’s (TILA) denition of “nance charge” to calculate the APRs for the loan products included in the Scorecard. In the John Warner National Defense Authorization Act of 2006, Pub. L. No. 109-364, § 670 (2006) (“Defense Au- thorization Act”), Congress set a cap of 36% for cer- tain loans made to active-duty military personnel but included more fees in the APR calculation than called for under TILA. This means that the APRs calculated under the Defense Authorization Act could be higher than the TILA APR for the same product. Because TILA covers products offered generally in the lending market, the Scorecard applies the TILA methodology rather than the military formula.
4 See National Consumer Law Center, The Cost of Credit: Regulation, Preemption, and Industry Abuses § 18.104.22.168 (4th ed. 2009) (permitting small loans at 36% annual interest rate was designed to address problem of loan-sharking by bringing legitimate lenders into small dollar loan market).
5 The original Scorecard and its statutory back-up are available at http://www.nclc.org/reports/content/ CU-Small-Dollar-IntroScorecard-8-28-08.pdf and http://www.nclc.org/reports/content/CU-Small% 20Dollar-backup-8-25-08.pdf. We have taken the opportunity afforded by updating the Scorecard and statutory back-up to make some minor corrections to material in the originals.
NATIONAL CONSUMER LAW CENTER
Updated Small Dollar Loan Products 5 iii