A Democratic proposal to regulate the payday loan industry has returned in the new legislative session, and progressive advocates are still concerned that the measure will allow predatory lending.
The bill would bring greater state oversight to some earned income access service providers — businesses that provide cash advances for income earned but not yet paid — in an attempt that supporters say would help New Jerseyans make ends meet, especially in the wake of financial instability caused by the pandemic.
“People were struggling to break even, and the idea was to give people the money they had earned for a small ATM-type fee instead of forcing them into debt or overdrawing their account,” said Sen. Gordon Johnson (D-Bergen). ), main sponsor of the bill. “This is far from a payday loan office on a street corner preying on desperate people.”
Payroll advance companies allow workers to receive advance pay for hours or days they have worked but have not been paid. Advances provided through an employer or an employer-contracted third-party company often come with a fee or so-called “gratuity” that is voluntary but strongly encouraged. Critics say these amount to loans, but the industry disagrees.
Advance fees are typically lower than payday loan fees because providers can withdraw funds directly from a worker’s paycheck.
New Jersey and 11 other states started an investigation in the payroll advance industry in August 2019, citing reports of exorbitant interest and fees, along with other predatory practices. Payday loans with high interest rates are prohibited in New Jersey.
Although similar in form and function, New Jersey does not yet consider advance payment loans, so they are not subject to certain regulations, such as the interest limits established by New Jersey’s usury laws, which cap interest rates. per annum for non-corporate borrowers at 30%. .
The bill would statutorily exempt payroll advances issued by companies contracted with an employer from our usury laws, while making payroll advances that work directly with consumers subject to them.
Businesses that work with employers would be subject to a fee cap set by the state Department of Banking and Insurance. The bill provides few guidelines for the level of the fee, and it is unclear how quickly the department must set the cap.
The end result is a bill that advocates say has too few protections and could push low-income New Jerseyans further down the socioeconomic ladder.
“Philosophically speaking, we think these products are problematic because they create an environment where people cumulatively reduce their income over time,” said Beverly Brown Ruggia, director of financial justice for the progressive advocacy group New Jersey Citizen Action.
The bill covers only cash advance companies that are integrated with an employer, though Brown Ruggia said the bill’s language is confusing and could open the door to direct-to-consumer advance services. Critics say such services could draw funds directly from consumers’ bank accounts.
Fees charged by payday advance companies tend to be less than the fees associated with bank overdrafts or traditional payday loans, but some people may seek multiple advances in a pay period, compounding costs.
Advances with fees in excess of the state limit would be considered interest and would be subject to New Jersey usury laws. The state would be responsible for licensing cash advance providers, which is not the case under current law.
While payroll advance fees are typically small because they are paid quickly, any business that borders the cap is likely to violate state usury laws. Taking a $100 advance five days before payday and paying a $5 fee equals an annual rate of 365%.
“These earned payment companies already exist and are already doing business in New Jersey,” Johnson said. “This legislation is to incorporate the practice into our current regulatory system to protect consumers while ensuring that working families can access the money they have already earned in the event of an emergency.”
It doesn’t look like the bill will move any time soon. The Legislature is expected to be limited to budget hearings throughout April, and Assemblyman John McKeon (D-Essex), a House sponsor of the bill and chairman of the Assembly Insurance and Financial Institutions Committee, said the talks with management continue. He is not sure when the bill will come before his committee.
“In concept, I really love the bill,” McKeon said. “I just want to make sure there’s not an unintended consequence of it looking like something like predatory lending, even on a much smaller scale.”
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