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loans have solved their debt trap problem; realizing a savings of $1.5 billion for their citizens while preserving a more responsible small loan market. In sum, the only proven way for state policymakers to protect their citi- zens from predatory small loans is to enforce a comprehensive small loan law with an interest rate cap at or around 36 percent.”18

After determining the maximum APRs allowed in each state, the Scorecard then com- pares the maximum allowable APR to a 36% APR cap. The 36% cap on small loan lending became the law in most states by the mid- twentieth century.19 Small loan laws were

18 Uriah King & Leslie Parrish, Center for Respon- sible Lending, Springing the Debt Trap: Rate Caps Are Only Proven Payday Lending Reform 4 (Dec. 13, 2007), available at http://www.responsiblelending. org/payday-lending/research-analysis/springing- the-debt-trap.pdf. In those states that try to improve their consumer protections, the payday loan industry often migrates to the loopholes to avoid coverage. For example, in 2005, Illinois enacted payday legislation in an attempt to increase protections to consumers. 815 Ill. Comp. Stat. 122/1-1–122/99-99 (effective Dec. 6, 2005). Before this Act, Illinois had repealed its usury cap for consumer installment loans. As soon as the new law took effect, some payday lenders began of- fering “installment” loans for over 120 days that cost more than the new payday loan law permits. For example, one product is a 140-day “look alike” loan requiring nine biweekly interest payments, with a nal balloon payment of the entire principal amount. For the borrower, this “installment” loan is essentially a fourteen-day payday loan with ten built-in rollovers. Woodstock Institute, Monsignor John Egan Campaign for Payday Loan Reform, Hunting Down the Payday Loan Customer: The Debt Collection Practices of Two Payday Loan Companies 4 (Oct. 2006), available at http://www.issuelab.org/research/hunting_down the_payday_loan_customer_the_debt_collection_ practices_of_two_payday_loan_companies. _

19 See Elisabeth Anderson, Experts, Ideas, and Policy Change: The Russell Sage Foundation and Small Loan Reform, 1910–1940, at 4, 39 (Mar. 8, 2006), available at

4 5 Updated Small Dollar Loan Products

adopted during this time in response to the widespread problem of loan-sharking. These laws were largely the product of the research and promotional efforts of the Russell Sage Foundation which, between 1916 and 1942, published seven drafts of a Uniform Small Loan Law.20 In 2006, Congress enacted a simi- lar 36% cap for extensions of credit to active- duty service members and their dependents.21 Specically, Congress declared it unlawful for lenders to extend credit for loans at an APR greater than 36% to active-duty service members and their dependents.22 In promulgating the reg- ulations to implement this congressional di- rective, the Department of Defense described the problem that abusive lending practices can have for consumers. It stated that:

[a] major concern of the Department has been the debt trap some forms of credit can present for Service members and their families. The combination of little-to-no regard for the borrower’s ability to repay the loan, unrealistic payment schedule, high fees, and interest and the oppor- tunity to roll over the loan instead of repaying it, can create a cycle of debt for

  • nancially overburdened Service mem-

bers and their families.23

http:// www.yale.edu/scr/andersen.doc (noting that thirty-four states implemented laws permitting small dollar lending at or about 36% annual interest rate from 1914 to 1943).

20 National Consumer Law Center, The Cost of Credit: Regulation, Preemption, and Industry Abuses § (4th ed. 2009).

21 John Warner National Defense Authorization Act of 2006, Pub. L. No. 109-364, § 670 (2006).

22 23 This cap became effective on October 1, 2007. Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, 72 Fed. Reg. 50,580, 50,581–83 (Aug. 31, 2007) (Department of Defense nal rule).


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