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The same concerns are present for many nonmilitary families in today’s economy. The Scorecard seeks to highlight the states that use their regulatory authority to protect consum- ers against abusive lending practices. More de- tail is provided in the statutory back-up to this Scorecard, available at http://www.nclc.org/ reports/content/cu-small-dollar-scorecard- backup-2010.pdf.

  • II.

    DESCRIPTION OF THE SMALL LOAN PRODUCTS INCLUDED IN THE SCORECARD

    • 1.

      Two-week, $250 loan (“payday” loan)

A payday loan is a short-term cash loan based on the borrower’s personal check held for future deposit or electronic access to the bor- rower’s bank account. A consumer writes a personal check for the amount borrowed plus the nance charge and receives cash. In some cases, instead of writing a check, the borrower signs over electronic access to his or her bank account to receive and repay the loan. Payday loans are made at stores and via the Internet.

The lender holds the check until the next payday when the total of the cash received and the nance charge must be paid in one lump sum. To pay a loan, the borrower can redeem the check for cash, allow the check to be deposited at the bank, or just pay a new

  • nance charge to roll the loan over for an-

other pay period. When state law prohibits rollovers, a sham in which the consumer re- deems the check and immediately re-borrows the same funds plus paying another loan fee may be used to accomplish what is, in effect, a rollover. Unfortunately, even a borrower who is able to repay the loan when it is due may

NATIONAL CONSUMER LAW CENTER

be left with inadequate funds to cover other expenses and wind up taking out another pay- day loan immediately or shortly after repaying the prior one. This back-to-back borrowing is known as “churning.”24 A study by the CRL concluded that 76% of payday loans are the result of churning (dened as a borrower tak- ing out a new loan within the same two week period as closing out an old loan).25

To get a payday loan, a consumer needs to have an open bank account in relatively good standing, a steady source of income, and iden- tication. Payday lenders do not conduct a full credit check, establish a debt-to-income ratio, or determine whether a borrower can afford to repay the loan when it comes due.

Two weeks is a typical duration for pay- day loans. In 2009, the median payday loan amount in the country was $350.26 This rep-

24 Uriah King & Leslie Parrish, Center for Responsible Lending, Phantom Demand: Short-Term Due Date Generates Need for Repeat Payday Loans, Accounting for 76% of Total Volume 5 (July 2009), available at http://www.responsiblelending.org/payday- lending/research-analysis/phantom-demand-short- term-due-date-generates-need-for-repeat-payday- loans-accounting-for-76-of-total-volume.html.

25 Uriah King & Leslie Parrish, Center for Responsible Lending, Phantom Demand: Short-Term Due Date Generates Need for Repeat Payday Loans, Accounting for 76% of Total Volume 3, 7 (July 2009), available at http://www.responsiblelending.org/payday- lending/research-analysis/phantom-demand-short- term-due-date-generates-need-for-repeat-payday- loans-accounting-for-76-of-total-volume.html.

26 Uriah King & Leslie Parrish, Center for Responsible Lending, Phantom Demand: Short-Term Due Date Generates Need for Repeat Payday Loans, Account- ing for 76% of Total Volume 15 (July 2009), available at http://www.responsiblelending.org/payday-lending/ research-analysis/phantom-demand-short-term- due-date-generates-need-for-repeat-payday-loans- accounting-for-76-of-total-volume.html.

Updated Small Dollar Loan Products 5 5

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