Massachusetts Payday Loans and Bankruptcy
Many folks come to us to discharge their debts in Massachusetts bankruptcy and get a fresh start. Often we see payday loans on their credit report. Massachusetts has very strict laws regarding payday loans. There are no actual payday lenders in Massachusetts, so folks often use the internet. However, in Massachusetts, payday loans require full documentation, the due date of the loan must be in writing, there cannot be any pre-payment penalties, the whole transaction must be complete within 14 days, and there are strict rules on how unpaid loans can be collected against. Of significance, interest rates cannot exceed 23%. These consumer protections are why we don’t see as many payday loans: they just are hard to get in Massachusetts. On the other hand, many of our clients have worked in other states, where the loans have become onerous.
In any event, payday loans are loans pledged against a worker’s next paycheck. Seventeen states allow payday loans, which have, to date, been so under regulated that some interest rates exceed 400%. One report we read said interest rates were as high as 521%
We have written about consumer advocate and Harvard Law Professor Elizabeth Warren in the context of bankruptcy news and as the founder and initial leader of the Consumer Financial Protection Bureau, however, now that she has become a candidate for the United States Senate for Massachusetts, we will refocus our energies on the CFPB and it’s new Chief, Richard Cordray. Cordray’s first order of business after being an interim appointment (Senate confirmation was not an option) is conducting hearings on Payday loans. (Ironically, the Dodd-Frank Act of 2010 expressly forbids the CFPB from regulating non-banks until a director was appointed, and then the Senate refused to allow an appointment, adversely affecting consumers.)
Payday loan makers may provide a valuable service. If someone needs money immediately, is working, and will be able to secure that money by the end of the week or pay period, it would be invaluable to have access to a loan for that money instantly. However, folks that fit into this category are often taken advantage of. It is the protection of those workers that the CFPB is addressing in their public hearings and investigation.
The Consumer Federation of America undertook a study of payday loan providers and published their findings in August 2011. They claim that interest rates for a $500 loan was 652%, and in Kanas the range was from 378% to 780%. They found that some lenders circumvented state laws by using international forums to lend the money; some used Native American tribal bases for their lending. Among their many conclusions was that “payday loans are a debt trap.”
If you search payday loans on the internet, you will find a lot of advertisements. The first one I found said I could get cash in one hour! All over the internet, of course. However, if you read the fine print, it indicated it was not available in Massachusetts. Another provider of payday loans used such cryptic language, even a Boston bankruptcy lawyer could not determine if they would provide a Massachusetts payday loan!
We applaud the efforts of the new CFPB to investigate these practices; we urge our clients to double check where they are getting loans from, what the interest rates really are, and what laws they are subjecting themselves to by taking out any loans.