What Is a "Calculated Fee" & What Are Its Application Fees?

Many state legislatures have been attempting to reign in payday loan abuses by introducing bills to legalize payday loans.

3 min read
What Is a "Calculated Fee" & What Are Its Application Fees?
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Many state legislatures have been attempting to reign in payday loan abuses by introducing bills to legalize payday loans. Opponents argue that such laws would allow unscrupulous lenders to take advantage of vulnerable and desperate consumers for profit. Opponents claim that the proposed legislation would make it illegal to provide emergency cash loans when requested by consumers in need of immediate money. Opponents also point out that existing laws regarding payday lending already ban certain transactions, like advertising payday loans, and they do not allow loan amounts to exceed the value of the loan itself.

Limits on payday loan lenders in Texas are only as strong as the weakest link. In this instance, that weakest link happens to be Tex. The state legislature passed a bill which limits the fees payday loan lenders can charge borrowers. In the end, payday loan lenders can still charge exorbitant fees, but only up to fifteen percent of the gross monthly income of the applicant.

Critics of the new legislation say the limit on fees is so high because the original legislation contained no fee cap. In addition, borrowers who exceed the allowable amount of fees will be charged higher interest rates than other lenders. Ultimately, payday loan lenders get their income from high-interest fees and high service fees, not from the amount of cash loaned. It's this income that keeps the credit access businesses in business, despite attempts to reform the industry.

What else can consumers do about predatory lending? They can look to credit services organizations, like the Consumer Financial Protection Bureau or CFPP. These groups work to ensure that lenders meet certain standards. They do this by reporting companies to the agencies if they find a significant number of complaints. One such group, the CFPP, has reported more than twenty Texas payday lending companies to the Department of Justice over the past two years.

The Department of Justice didn't take any action because it found that the states had first required the collection of these fees in 2021. Over the past few years, the CFPP has done nothing. Perhaps because no one has reported the companies for three years. Until now. The state's consumer financial protection bureau has fined many credit access businesses for their failure to report the fees.

This time, however, the Texas attorney general has brought action. Attorney General John Kay has filed a lawsuit against the nation's largest payday loan lender. The complaint asserts that the lender violated the state's consumer financial protection statute because it imposed an interest rate that was unanticipated, inaccurate, and unfair. According to the complaint, the payday loan was "designed to exploit unwary borrowers' desperate need for cash," and that this "egregious and illegal" practice constitutes fraud. It is also charged that the lender did not inform borrowers of the statutory limitations on interest rate and the penalty for exceeding that limit.

Furthermore, the complaint reason further charge fees for providing a pre-approval to borrowers for a loan extension; failing to inform them of the mandatory minimum qualifications for obtaining a bank account; charging application expenses and late charges; failing to provide a copy of the agreement to the borrower at the time the application was approved; failure to provide a copy of the agreement at the time the loan was granted; and failure to provide the requested loan amount. The CFPP is expected to file a response to the complaint by the end of June. If the bank does not respond in time, the attorney general will file suit.

If the CFPP's complaint is sustained, the Texas attorney general could seek judgments against all other banks, lenders, and payday advance service providers. This would be a virtual wipeout for all but the smallest lending institutions in the state. At the present time, it appears that only two out of nine Texas payday loan service providers have retained CFPPs. These two companies have settled with the attorney general and are not facing possible legal action. Some borrowers who applied for extensions have already received payments from their extensions.