Payday loans are considered the easiest and fastest way to obtain a short-term loan. You can easily obtain a payday loan within a day, get approval even if you have a bad credit score, and receive the loan without having to go through cumbersome paperwork that is otherwise involved in obtaining regular loans.
In the past few years, payday lending laws have undergone drastic changes in a move by the government to crack down on predatory lending practices. Watchdog organizations claim that the lenders charge exorbitant rates on loans, which is unscrupulous and unfair. Meanwhile, lenders appeal to the lawmakers that their services are in the best interest of the consumers as they solve the customers’ short term financial needs.
Here we will take a look at the current legal standing of payday loans in the state of Massachusetts, and the reasons they are under close scrutiny by the state government.
Payday Loan: An Overview
Payday loans are short-term and unsecured personal loans that are offered at a very high rate. The amount of the loan varies but it is typically for very small amounts, from $100 to $1,500. These loans are also referred to as payday advance, payroll loan, small dollar loan, salary loan, short term or cash advance loan.
Since the loans are considered high-risk loans for the lenders, they charge very high percentage on the loan, usually averaging 500% per annum. The cost of the loan in some cases exceeds the original amount of the loan borrowed.
The borrower authorizes the payday lender to automatically debit the bank account to receive payment of the full loan amount along with the fees and finance charges. The loan is usually due within a 14 days period, but some lenders offer the loan until the borrower's next paycheck. The borrowers typically use the payday loan amount to fulfill their end-of-the-month financial needs when they have run out of cash in the account.
Legal Status of Payday Loan in Massachusetts
Payday lending is not specifically prohibited in Massachusetts. However, lenders are not allowed to charge excessively high annual percentage rates on the short-term loans. Financial entities that want to engage in small lending practices in Massachusetts must meet statutory licensing provisions to carry out operations in the state. They are required to obtain a small loan license from the Division of the Banks (the Division) to offer small loans to the public.
Massachusetts state laws mandates that institutions that are engaged in business offering loans in the amount $6,000 or less and at an interest rate greater than 12% must obtain a small loan company license in accordance with Regulation 209 CMR 20.00: Small Loans, Sales Finance Companies and Insurance Premium Finance Companies and chapter 140, section 96-114A of the Massachusetts General Laws.
The small loan lenders in Massachusetts can currently offer the loan at a maximum rate of 23% with an annual fee of $20 for covering administration expenses.
The Division has made it clear that legal provisions regarding online payday lenders and licensure that the payday loan transaction occurs where the consumer is present when he or she applies for the loan, and not where the lender is located. So, any lender that offers the payday loan to consumers in the state of Massachusetts is required to obtain a small loan license from the Division.
Legal Application Process
Applicants that want to obtain license for making small loans have to file the application under legal provisions M.G.L. c. 140, § 96. Each applicant has to submit an application with the Division. Each applicant that applies for the small loan license must demonstrate that it has a net worth above $75,000.
The applicants have to submit financial statements of the previous fiscal year that have been reviewed or audited by an independent CPA (Certified Public Accountant) during initial or renewal application for the small loan license. Other information that may be required by the commissioner of the Division includes character and fitness certificate, business experience letters, and educational background of management and the employees.
Legal Responsibilities and Requirements
Authorized small loan providers are required to keep record of all the accounts and other information that will allow the commissioner to determine whether the provisions of M.G.L. c. 140, § 96 are being complied with by the licensee.
The licensee is required to maintain a complete record of every customer's account including terms of agreements, loan payment terms, payments due dates, installment payment dates, refinancing amount and date, refunds, and other legal actions. Finally, the licensee is also required to update the commission about significant events such as proposed change in ownership, bankruptcy protection, license revocation in other states, and other similar information.