November 9, 2005

LANSING – Governor Jennifer M. Granholm today applauded state lawmakers for approving regulations she called for to protect consumers from payday lenders.  The House and Senate gave final approval this week to the conference report on House Bill 4834 sponsored by state Rep. Bill McConico (D-Detroit).

“Regulating payday lenders is key to preventing fraud, abuse, and illegal activity,” Granholm said.  “This bill contains strong consumer protections and will protect Michigan consumers from the pitfalls of debt.”

Granholm and officials from her administration worked with Senate and House leadership to produce this compromise.

“I made it clear to state lawmakers that we could accept nothing less than strong consumer protections and am proud that we worked together to make this happen,” Granholm added.

Michigan consumers who utilize these services have a job or other steady income, yet are in need of short-term financial services that they are unable or unwilling to obtain from traditional financial institutions. 

The bill significantly limits the maximum fees allowed based on a sliding scale of the transaction amount.  The maximum individual loan amount permitted under the bill would be $600, with two outstanding loans allowed at a time.  The sliding fee schedule would be:

•  $0-$100      15%
•  $100-$200   14%
•  $200-$300   13%
•  $300-$400   12%
•  $400-$500   11%
•  $500-$600   11%

“Last session, I vetoed a payday lending bill because the effective transaction fee was 15.27 percent, which is too high,” Granholm said.  “I pushed for a lower rate, and this bill has a lower rate of 12.6 percent for a maximum $600 loan.  This bill also starts protecting consumers months earlier than the previous version.”

In the House-passed version, the effective date of the bill was July 31, 2007.  The conference report adopted this week moved the effective date to June 1, 2006.

The bill also creates a state-controlled database designed to provide effective real-time enforcement of the dollar amount and rollover limits in the bill.  This includes Internet-based checks of the database to verify customer eligibility and imposes strict limitations on the use of data to protect consumer privacy.

“This database will prevent the spiraling cycle of short-term consumer debt that entraps the most vulnerable users of these payday lending services,” Granholm said.

Other consumer protections in the bill that Granholm helped develop include:
 
•  licensing and financial background checks for payday lenders;
•  prohibition on rollovers, the renewal of loans for an additional fee;
•  prohibition on the use of criminal process to enforce payday lending claims;
•  mandatory posting and prominent notice of applicable fees and charges;
•  allowing the Office of Financial and Insurance Services (OFIS) Commissionerto delete customer information from the database once it is no longer needed;
•  requiring payday lenders to offer consumers who regularly use payday loansa repayment plan to get out of a cycle of debt;
•  dispute resolution options for consumers, including:
-  rescission of the contract by the end of the following business day;
-  working with payday lenders to resolve any transaction irregularities;
-  administrative review by OFIS, with the ability of consumer to file formal complaints;
-  the ability of consumer to file private causes of action when other avenues   have been exhausted;
•  placing strict limitations on the ability of payday lenders to place arbitration   clauses in payday loan agreements;
•  prohibiting the use of criminal process to enforce debts and limiting the civil  enforcement of debts.

While some opponents of the bill have claimed it would hurt the payday lending industry, studies of the industry in states where similar laws have been enacted have shown no ill effect on payday lending institutions, large or small.  After passage of a law in Oklahoma, the single largest growth rate occurred among smaller payday lending companies with two to five locations.  Florida, which has a straight 10 percent fee, coupled with a $5.00 verification fee, still has a thriving payday lending industry.

While payday lenders were virtually unheard of 12 to 15 years ago, Granholm recognizes that customer demand for the product is very strong, and the industry has grown dramatically over the past decade.  Considering the explosive growth of the industry in Michigan – in a largely unregulated environment – it’s hard to argue that industry regulation isn’t both needed and long overdue.

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