In Nevada, it is perfectly legal to get a loan with an interest rate of 521 percent.

Though the number appears outrageously high to anyone used to normal banks and loans, that three-digit interest rate is actually the average amount charged on “payday loans” — the high-interest, short term loans that are regulated but not capped under state law.

And with Nevada’s low ranking financial literacy, recent court cases against well-known lenders and a growing public perception against “predatory lending,” a handful of state lawmakers are pushing to implement the first major reform to payday lending laws for the first time in more than a decade.

Industry members say their existing business model serves a need for low-income populations that don’t have access to traditional lines of credit, saying their business model should be compared more to bank overdraft fees than traditional loans and that several of the legislative proposals would kneecap the industry. Their arguments are buttressed by six figures in campaign donations made to lawmakers and the roughly two dozen lobbyists representing them in Carson City.

The coming clash will likely surface publicly with two payday lending bills scheduled for a hearing on Wednesday, the latest chapter in a long-running saga that promises to bubble up again during the 120-day legislative session.

Types of high interest loans

Most references to “payday lending” or “predatory lending” are usually made without further explanation, but Nevada law specifically regulates and defines individual types of high-interest loans.

Any loan that charges more than 40 percent annual percentage interest rate is considered a “high-interest loan” under Nevada law, subject to multiple rules and regulations. Here are a few examples of loan types defined and overseen in the law:

Title Loan: In Nevada law, title loans are defined as having a higher than 35 percent interest on a loan that involves giving the title of a legally owned car as collateral for securing a loan, or adding a loan issuer as a lien holder on the vehicle as part of the loan. In Nevada, loans are required to not exceed the “fair market value” of the vehicle and are limited to 30 days (up to six extensions, with conditions) and no interest rate cap. Customers are required to disclose their employment status, income and ability to repay the loan before it’s issued.

Deferred deposit loan: The legal definition for deferred deposit loans (or payday loans) cover any financial transaction that involves an individual writing a check or agreeing to transfer money to a lender at a specified time (including a fee) in exchange for an upfront payment. State law puts various restrictions in place on these types of loans, including limiting their length to 35 days (up to 90 under certain conditions) and prohibiting the loans from exceeding more than 25 percent of a person’s total monthly income. Deferred deposit loan companies are generally prohibited from extending more than one loan at a time to a customer, but the lack of a statewide loan database and the ability of customers to simply apply for a loan at a different business makes the provision difficult to adhere.

Check-cashing service: Legally defined as “any person engaged in the business of cashing checks for a fee,” check-cashing businesses generally serve people without bank accounts and are subject more state regulations with a number of exemptions written into state law (businesses operating before 1973). Like other high-interest loans, check-cashing services are required to register with the state and to disclose their rates with customers.

Refund Anticipation Loan: Any loan offered by a lender based “on the taxpayer’s anticipated federal income tax refund.” These types of loans are exempt from high-interest loan law.

Generally, several protective aspects in state law apply to all high-interest loans, including the 25 percent monthly income limit on loans, prohibiting lenders from threatening customers, a clear posting of fees and information, requiring contracts be written in the same language the transaction was completed in and charging fees for a grace period.

State law also requires loan companies to offer repayment plans before commencing a civil lawsuit or repossessing a vehicle under the terms of the loan. It also requires companies to offer the repayment plan at least 30 days after they default on a payment and must give customers a up to 90 days to make the payments with any additional interest rates capped at around 15 percent.

Nevada’s Division of Financial Institutions is charged with overseeing the industry, including licensing, issuing regulations and engaging in oversight and enforcement of the state’s 95 licensees (between 500 and 600 individual branches). Division commissioner George Burns said the 35-person department spends about 30 to 40 percent of the time overseeing high-interest lenders, but stressed that the majority of them were “good actors.”

“They do want to comply with the law. When we do find errors and or violations they’re quick to correct those,” Burns said. “It’s a relatively smaller percentage of bad actors that we spend the majority of our time on.”

Regulators with the division have already sent out three cease and desist letters to lenders in 2017.

While the department does annual surprise inspections of each branch to check if they’re complying with state law, Burns said that regulators rely on public reporting and industry self-policing.

“Our number one line of defense is the public and them reporting it,” he said. “Our second major line of defense is the industry, because competitors love to turn their competitors in. It’s pretty hard for them to get away with it.”

Expansion and regulation

High-interest payday loan businesses mushroomed in the 1980s and 1990s, after Nevada lawmakers abolished the state’s 18 percent cap on interest loans during a 1984 special session held to induce Citicorp to open a credit-card processing center in Las Vegas. Removal of the cap, a form of which had been in state law since 1913, led to a ballooning of high-interest short term lenders with names familiar to anyone who’s driven by a Las Vegas strip mall — TitleMax, MoneyTree and others.

The first stab at regulation came in 1997, when lawmakers approved a bill requiring payday lenders to register with the state and some protections for consumers. But industry members and lawmakers alike criticized the law as overly vague and ineffective, leading then-Democratic Assemblywoman Barbara Buckley to propose a larger overhaul of payday lending laws about a decade later.

Buckley — now director of the Legal Aid Center of Southern Nevada — passed bills in 2005 and 2007 that make up the bulk of Nevada law regulating high-interest lenders. She said her legislation, most of which hasn’t been meddled with over the last decade, put in place badly needed consumer protections.

“The interest rates charged were just astoundingly high,” she said. “And the lenders deliberately keep the loans going as long as they could to allow the interest to accumulate so that people’s lives were basically being destroyed.”

Still, payday and other high-interest short term loan lenders were able to find workarounds and loopholes in the law, especially after she became Speaker and as the state turned its focus to mitigating the effects of the Great Recession.

“You know, it was like playing Whack-A-Mole,” she said. “You’d do something; they would try to get around it.”

Outside of a 2015 bill from Republican Sen. Michael Roberson that Financial Institutions Division Commissioner George Burns called a “supportive reiteration” of existing state law, payday lending laws haven’t changed much since Buckley left office in 2009 (Roberson disagreed, saying his bill expanded state law and adding, “I don’t care what George Burns thinks.”)

It’s why a handful of Democratic lawmakers and the state treasurer are proposing changes that could significantly revamp payday loans, ranging from a redefining of “default” to the reinstatement of a maximum interest rate that can be charged on a loan.

Current problems and loopholes

While industry members say Nevada’s payday lending market is relatively tightly regulated (it’s one of 38 states that doesn’t prohibit or significantly limit high-interest loans), legislators and advocates say the system has several structural loopholes that can easily trap consumers in spiraling debt.

For one, there’s no limit on the number of loans an individual person can take out at a given time — lenders are prohibited from extending loans exceeding more than 25 percent of a person’s monthly income, but that number isn’t totaled across multiple loans.

So-called “grace periods” for loans are also up for discussion, especially in the wake of an ongoing legal fight between the state and TitleMax, a title loan company that offered consumers a modified “grace period payment deferment amendment” that led to a higher accrual of interest charges.

Those provisions and more make up the bulk of AB163, legislation sponsored by Democratic Assemblyman Edgar Flores that more clearly defines the definitions of “grace periods,” default” and “ability to repay” — seemingly innocuous terms that play a major role in how the entire process works.

It would strip existing law allowing for extensions on defaulted loans on the original terms, which Flores says will protect consumers because it would trigger mandated repayment plans and lowered interest rates more quickly.

His bill would also explicitly prohibit lenders from issuing title loans to customers if they don’t actually own the vehicle being put up for collateral.

“People are getting loans on assets they don’t own, which is completely crazy to me,” Flores said. “That’s just ludicrous.”

It also places a definition of “ability to repay” in state law. Currently, lenders are required to have customers sign an affidavit before receiving the loan indicating that they are able to pay the balance and interest back, but Flores’s bill would require lenders to essentially create a checklist including current employment status, monthly income, credit history and any other required payments such as child support or alimony.

Burns, whose department implements the regulations if passed, said that clarifying language was the most helpful thing legislators could do to ensure smooth regulation.

“The more that the law can be defined so that words can't be parsed into multiple meanings and argued multiple ways, the better for us as a regulator,” Burns said.

Flores’s bill isn’t even the most controversial high-interest loan measure being brought forth on Wednesday. AB222, proposed by fellow Assembly Democrat Heidi Swank, would implement at 36 percent interest rate cap on all short-term loans, among other changes

Industry members say the cap would destroy their business.

“The 36 percent annualized percentage rate is effective prohibition, let’s be clear,” said Jamie Fullmer, an executive with Advance America, which operates 11 branches in Nevada.

While interest rates on short-term loans might seem astronomically high — the pro-regulation Center for Responsible Lending estimates the state’s average payday loan rate to be 653 percent — industry members like Fullmer say small-dollar, short-term loans should be viewed more as an alternative to sky-high overdraft fees offered by banks, or as a last-minute alternative to financial emergencies, such as someone’s utilities being shut off.

Swank’s bill also creates a loan database (paid for by surcharges on the loans), requires new deferred deposit or title loan businesses to be at least 1,320 feet apart, prohibits customers from taking more than one loan at a time and creating a 30 days “cooling off” period between loans. She acknowledged that while her bill was somewhat of a wish-list of reforms, legislative action usually comes in smaller chunks than wholesale immediate change.

“For me, I’d like to see some of these big changes done, but I know that often things come in increments, and that often makes it more palatable to come through,” she said.

Buckley said that while creating an interest rate cap could be the “cleanest, easiest” way to stem abuse, the potential for a lack of “legislative appetite” to implement the cap means that other changes to the law — like cutting down on extensions and grace periods that extend the life of a loan — might be more easily passed.

“Somebody paying $30 to borrow $200 for two weeks — it’s outrageous, right? But life as we know it is not going to end,” Buckley said. “Where the harm comes is through multiple loans and multiple extensions, and that’s where they are stripping the wealth from the low- and moderate-income communities, and really causing grave financial harm to the community.”

Fullmer said that in addition to the interest rate cap, protections being proposed in Nevada and in other states would hurt their customers. He said that the credit needs for working-class people without access to traditional capital wouldn’t go away if his company closed their 11 statewide branches, and that advocates for reform only hear horror stories and not the average customer experience.

“Imposing arbitrary restrictions at any time is not consumer friendly,” he said.

An unlikely ally in the fight for heightened payday loan restrictions is polarizing Republican Treasurer Dan Schwartz, who used two of his five allocated bill drafts to propose a number of changes to payday lending law including creation of a statewide database of high-interest loans and a mandated “cooling off period” if a customer defaults on a loan.

Despite an at-times chilly reception during a hearing on SB17 in February, Schwartz’s chief of staff Grant Hewitt said the office has been working on payday loan issues since holding roundtable conferences on the topic last year and that ideas — like a database of high-interest loans — would find their way into other bills.

“Some of the ideas that came from these roundtables that we had are going to find their way into other bills,” he said. “And the treasurer, while he would love to see his piece of legislation passed, is about creating a conversation that drives reform.”

Hurdles

Like most other profitable industries in Nevada, payday loan companies have a robust lobbying presence at the Legislature and make up prolific chunk of campaign contributors.

Forty-eight of the 63 members of the Legislature received contributions from payday or other high-interest loan businesses, with most of the $134,000 in donations going to Democrats. Those companies in turn hired about two dozen lobbyists for the 2017 session, including several former legislators.

Buckley said the current environment isn’t very different from the one she faced in 2005 and 2007.

“You could not walk down the hallway without my colleagues getting lobbied by payday lender after payday lender,“ she said.

Reforming payday loan laws isn’t listed as a priority in legislative Democrat’s “Nevada Blueprint,” but Democratic lawmakers are quick to point out its omission from the document does not signal opposition to the concept.

“We wouldn’t be having a hearing on it if we didn’t think it was something that we needed to have a conversation about, to talk about on both sides of it,” Assembly Speaker Jason Frierson said. “But there are a lot of bills that we like, that I may vote for, that aren’t necessarily part of the Blueprint.”

William Horne, a former Democratic Assemblyman and lobbyist for Advance America, said that “good actors” in the industry appreciated the need for regulation but questioned whether lawmakers had reached out to enough to industry members to see what needs changing.

“We’ve always been at the table,” he said.

Swank said she hadn’t heard many complaints from fellow lawmakers about her bill, but acknowledged that after three sessions she has realized that change tends to come in increments rather than any sweeping wholesale overhauls.

“We’ll get some stuff through, and then that will settle in two years, people will be like, ‘It’s not so horrible,’ and after that let’s see if there are other adjustments that we can make that make sense,” she said. “I have this session and three more to go, so I’m going to be here for a little while.”