Rule says annual interest must be disclosed for `payday loans'

Friday, March 24th 2000, 12:00 am

By: News On 6

WASHINGTON (AP) -- The Federal Reserve published a rule Friday to make clear that businesses offering so-called "payday loans" must disclose to customers in writing the loans' annual interest rates.

The short-term, high-interest cash advances against borrowers' paychecks, often provided by storefront lenders, can carry triple-digit interest rates on an annual basis.

With its new rule, the Federal Reserve clarifies that payday loans are subject to terms of the Truth in Lending Act. That means the lender must disclose in writing, before a transaction is completed, the loan's finance charge and its annual percentage rate.

The central bank's staff attorneys previously considered payday loans to fall under the Truth in Lending Act, but the new rule makes that interpretation official. The rule took effect Friday, but compliance is voluntary until Oct. 1.

Payday loans recently have come under criticism by consumer groups and members of Congress.

A senior Democratic lawmaker proposed legislation this month aimed at restraining the business. Rep. John LaFalce of New York,
senior Democrat on the House Banking Committee, cited a survey by consumer groups that showed a borrower can pay interest of 400 percent or more on an annual basis for payday loans.

LaFalce's bill would prohibit federally insured banks from making payday loans either directly or through affiliates.

Critics of the industry maintain that some payday loan companies skirt the law in the 19 states that ban them by teaming with
nationally chartered out-of-state banks.

Officials of the payday loan industry acknowledge problems, including cases of excessive use of "rollovers" in which
consumers, unable to repay the loans, have them extended for two weeks or so. But they insist new federal regulation is not needed.

"Our product fills a tremendous market need and is enthusiastically embraced by millions of working Americans," Billy Webster, president of the company Advance America and head of the Community Financial Services Association, said recently.

The industry earned an estimated $1.4 billion last year.

Payday loans work this way: You need money today, but payday is a week or two away. You write a check dated for your payday and give it to the lender. You get your money, minus the interest fee. In two weeks, the lender cashes your check or charges you more
interest to extend, or "roll over," the loan for another two weeks.

The typical fee for a $100 cash advance is $15. Industry officials say that is reasonable compared with the fees banks charge for bouncing a check, which average $22.

The 19 states and two U.S. jurisdictions that ban payday loans are Alabama, Alaska, Arizona, Connecticut, Georgia, Maine,
Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, North Dakota, Pennsylvania, Rhode Island, Texas, Vermont, Virginia, West Virginia, Puerto Rico and the U.S. Virgin Islands.