Deferred Deposits, Delayed Justice?

24 11 2009

2010 General Assembly Facing Tough Issues

From the KY Gazette  (November 2009)

 by Laura Cullen Glasscock at

Deferred Deposits [ 2010 General Assembly]

The provisions of the check-cashing and deferred deposit statutes are currently contained in Subtitle 9 of KRS Chapter 286 that authorizes licensed deferred deposit businesses to charge a service fee not to exceed $15 per $100 borrowed. The service fee is for a period of 14 days. Borrowers may obtain one loan not to exceed $500 at any one time, and rollovers are prohibited. The deferred deposit transaction statutes were amended in 2009, effective July 1, 2010, by House Bill 444 to expand regulation of the industry. The legislation also provides for a 10-year moratorium on licensure of new businesses after July 1, 2009. A review by staff of the Kentucky Office of Financial Institutions annual reports found the number of licensed payday locations in Kentucky increased from 214 in 1998 to 754 currently.

On its face, a $15 fee per $100 borrowed appears to be interest in the amount of 15 percent. However, because of the 14-day loan term, a new loan can be obtained 26 times per year, which results in an annual percentage rate of 391 percent. Reportedly, most borrowers are unable to repay the loan with their next paycheck. As a result, borrowers often take out a new loan before their next paycheck, resulting in an additional fee. Several sources report that 87 percent of new loans are opened within two weeks or before the borrower’s next payday, indicating they are unable to repay the original or previous loan and sustain the cost of living expenses without taking out a new loan. This common practice is referred to as “rollover” Making multiple rollovers, referred to as “churning,” results in an annual percentage rate of 391 percent in Kentucky. Nationwide, churning accounts for 76 percent of the deferred deposit total loan volume.

There are alternative methods of providing small, short-term loans up to $1,000. In an effort to reach the unbanked population, the Federal Deposit Insurance Corporation is currently conducting a two-year pilot program for banks to provide small loans up to $1,000 to borrowers, even if they have poor credit. Thirty-one banks in 15 states are enrolled in the project, including two banks in Kentucky, Citizens Union Bank in Shelbyville and Kentucky Bank in Paris.


Virginia Governor is getting state into the emergency-loan business

13 07 2009

Virginia Launches Innovative State Employee Loan Program

Gov. Timothy M. Kaine recently announced a program that will allow state employees to take out short-term, low-interest loans to meet emergency cash needs.

The Virginia State Employee Loan Program will be run through the Virginia Credit Union and allow state workers who are members to borrow up to $500 twice a year. The program is backed by the Commonwealth Virginia campaign, the non-profit organization that coordinates the charitable donations of state workers.

“This program will allow our state employees to receive small loans without having to go to predatory lenders,“ Kaine said at a news conference this morning at the state capitol in Richmond.

Click here to watch Governor Kaine’s  news conference video online

The interest rate for the loans is 24.99 percent APR—- substantially lower than the rates for loans obtained through payday lenders, where rates can exceed 300 percent for some products.

Under the state loan program, a borrower who takes six months to repay a $500 loan will end up paying a total of $540, including interest. There are no fees or pre-payment penalties attached to the loans.

The program is limited to current state employees, whose loans are repaid through automatic deductions from their accounts. But at a news conference this morning, Kaine said he hopes private employers and other government entities use the program as a model to extend short-term credit to their workforce.

To qualify for a loan, employees must first take a “Financial Fitness Education” course online—part of an attempt by officials to increase pass a financial literacy among the workforce.

Virginia is getting into the emergency-loan business.

Gov. Timothy M. Kaine today is expected to announce a short-term lending program for state employees that would allow workers to take out lowinterest loans of up to $500 to meet emergency needs.

Borrowers would have up to six months to satisfy the debt, which would be repaid through payroll deductions.

“It’s a way to help out people who need money in a hurry so they don’t have to go to outside lenders,“ said Kaine press secretary Gordon Hickey. The state has about 100,000 employees.

“The governor hopes this will be a model for private companies to use for their employees,“ Hickey said.

State workers who are members of the Virginia Credit Union will be eligible for the program, which officials said will cost no taxpayer dollars. The lending will be backed by the Commonwealth Virginia Campaign, the nonprofit, 501c organization that coordinates the charitable giving of state workers.

Details on the interest rate and the number of loans employees are eligible to take out per year will be released today at a Kaine news conference to roll out the program.

But Hickey said the borrowing would come at “a considerably lower rate than they could get anywhere else—a lot less than 36 percent,“ he added, referring to the payday-lending business.

Payday lenders have been criticized for charging exorbitant interest rates and offering complex lending options that enable borrowers to cycle deeper into debt. Reforms and restrictions imposed on the industry by the General Assembly during the past two years have sent a number of the lenders packing.

Under the assembly’s most recent crackdown on payday lending, which took effect July 1, lenders will be required to choose between offering payday loans, whose fees are fixed, and open-ended loans, which can carry sky’s-the-limit interest rates. Lenders that get out of the payday business lose their licenses to offer such loans in Virginia for a decade.

Meanwhile, as the national recession continues, banks and other traditional lending institutions have been reluctant to extend credit and typically do not provide the smaller, emergency loans available under the program.

Contact Jim Nolan at (804) 649-6061 or .