The Legislature needs to act on payday lending
by Benjamin Edwards
The Legislature should address exploitative practices in Nevada’s payday and short-term lending market. Fortunately, it has two opportunities with legislation already introduced.
Sen. Cancela proposed a measured, incremental bill to fund the creation of a database to track payday lending activity in Nevada. The measure would make state regulators more effective in overseeing the state’s payday lenders. As Gov. Sisolak already has announced his support for a database, the Legislature just needs to drop it on his desk. Assemblywoman Heidi Swank also now brings another option — simply capping rates at 36 percent, the same cap as used in the Military Lending Act.
The two bills continue a broader debate over payday lending. As one scholar explained, the debate centers on whether payday borrowers act rationally “because borrowers need access to credit and lack superior alternatives” and/or whether lenders simply exploit “consumers' systematically poor decision making.” If many low-income Nevadans lack sufficient sophistication to protect their own interests, the payday lending industry may earn significant profits by baiting borrowers into bad deals.
If you want to know whether the access to capital story is real or a slick lobbyist talking point, consider how Nevada’s payday lenders advertise. One Las Vegas establishment doing business under the name “Cash Cow” has a sign advertising payday and title loans for people who “owe on taxes.” The sign suggests that Nevadans without the ready cash to pay federal income taxes owed should take out a payday or title loan to make the payment. (It’s reasonable to focus on federal tax bills because Nevada has no state income tax.) Also, the sign features an image of Uncle Sam waving an American flag — iconography “officially adopted as a national symbol of the United States of America in 1950.”
Cash Cow’s advertised suggestion must be evaluated against the alternative — simply coming to terms with the IRS and requesting an installment agreement. The IRS generally offers reasonable terms to taxpayers. To be sure, the IRS does charge taxpayers interest and penalty fees when they fail to pay their taxes on time. To calculate the interest owed, the IRS uses the federal short-term rate plus 3 percentage points. For the first quarter of 2019, the interest comes to just 6 percent, and there are some other small fees. For taxpayers who file on time and request an installment agreement, the IRS also tacks on a modest “one-quarter of one percent for any month in which an installment agreement is in effect.”
Payday and title loans offer very different terms. In contrast to the low rates available from the IRS, the average Nevada payday loan works out to more than 650 percent interest. Nationwide, the average single-payment title loan comes in at about 300 percent or around an eye-popping 259 percent for an installment loan. A consumer lured into a payday or title loan will likely end up paying somewhere between 40 times to 108 times more interest than they would pay on penalties and interest to the IRS.
This makes it difficult to imagine any economically rational person taking out a payday loan instead of simply requesting an installment agreement from the IRS. But despite the terrible terms, it’s fair to assume that Nevadans have taken out payday loans to pay federal income taxes. (After all, Cash Cow would probably not keep the ad up if the sign did not work to bring in customers.) Many cash-strapped Nevadans without tax expertise likely fear that they could face jail time if they failed to pay their taxes on time. This fear likely drives them to accept predatory deals instead of simply filing a return on time and requesting an installment agreement.
Despite the many obviously predatory promotions of the industry, the Legislature may still struggle to adequately address payday lending. Payday lenders have donated more than $170,000 to lawmakers and have retained at least 22 different lobbyists for the session — enough to staff two football teams. Despite these contributions and the industry’s well-financed squads, reform on payday lending needs to get off the line of scrimmage this session.
Benjamin Edwards is a law professor at the University of Nevada, Las Vegas William S. Boyd School of Law. He researches and writes about business, securities, and consumer protection issues.