Law Faculty Scholarship


Across America, drivers pass twice as many payday loan storefronts as Starbucks coffee shops.2 In twenty-nine states, there are more payday lender stores than McDonald’s restaurants.3 Numerous research studies warn of the dangers associated with payday loans, including significantly higher rates of bankruptcies, evictions, utility shut-offs, and involuntary bank account closures.4 Many states have recognized the dangers posed by payday and other types of small-dollar loans with predatory features, prompting them to adopt laws to combat the abusive nature of these loans. These laws, however, offer consumers varying degrees of protection.

Historically, states have used their police powers to protect consumers from predatory lending. This Article discusses the extent to which each state’s current laws protect consumers from lending abuses associated with four common small-dollar loans: payday loans, auto-title loans, six-month installment loans, and one-year installment loans.5 Specifically, this Article highlights the findings from the 2010 Small Dollar Loan Products Scorecard (Scorecard), which updated the original 2008 Scorecard. 6 Both the 2008 and 2010 Scorecard grade state laws based on the maximum annual percentage rate (APR) they allow for the four typical small-dollar loan products listed above. Since the 2008 Scorecard, there has been significant state legislative activity across the country related to small-dollar loans. Only a handful of states, however, have enacted new measures that adequately protect consumers. This Article provides policy recommendations to guide ongoing reform efforts.

The Article highlights three key points. First, states should continue their longstanding good fight on behalf of American families against abusive, small dollar lending, but they need help. Congress and the Consumer Financial Protection Bureau (CFPB), which President Obama established when he signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law on July 21, 2010, should join the battle.7 Second, the states and Congress should focus their reform efforts on enacting an across-the-board usury cap of 36% APR on all small-dollar loans. Third, the states, CFPB, and Congress should impose several restrictions on high-cost (over 36% APR), small-dollar lending to help curb its abusive nature.

In this Article, Part II describes the methodology used by the 2010 Scorecard. Part III reports the major changes that have occurred in the two years since the Scorecard’s original 2008 publication. Finally, Part IV proposes several policy recommendations, at the state and federal level, with the focus in the latter category on opportunities for action by the newly created CFPB.

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Journal Title

Suffolk University Law Review

Document Type