Regulation of lending institutions is handled primarily by individual states, and this growing industry exists atop an active and shifting legal landscape. Lenders lobby to enable payday lending practices, while opponents of the industry lobby to prohibit the high cost loans in the name of consumer protection.

Payday lending is legal and regulated in 37 states. In Georgia and 12 other states, it is either illegal or not feasible, given state law. When not explicitly banned, laws that prohibit payday lending are usually in the form of usury limits: hard interest rate caps calculated strictly by APR.

In the United States, most states have usury laws which forbid interest rates in excess of a certain APR. Some payday lenders have succeeded in getting around usury laws in some states by forming relationships with nationally-chartered banks based in a different state with no usury ceiling (such as South Dakota or Delaware). This practice has been referred to as “rate exportation”, the “lender/servicer” model, or the “rent-a-bank” model. Under the legal doctrine of interest-rate exportation, established by Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp. 439 U.S. 299 (1978), the loan is governed by the laws of the state where the bank is chartered, regardless of the borrower’s state of residence. This is the same doctrine that allows credit card issuers based in South Dakota and Delaware states that abolished their usury laws to offer credit cards nationwide. As federal banking regulators became aware of this practice, they began prohibiting these partnerships between commercial banks and payday lenders. The FDIC still allows its member banks to participate in payday lending, but it did issue guidelines in March 2005 that are meant to discourage long term debt cycles by transitioning to a longer term loan after six payday loan renewals. As a result, no federally insured banks engage in the business of payday lending as of 2007 using an agency model.

For usury laws to be effective, they need to include all loan fees as part of the interest. Otherwise, lenders can charge any amount they want as fees and still claim a low interest rate. State laws in the United States generally preclude charging of fees other than those expressly permitted by law, and the federal Truth In Lending Act requires disclosure of all fees. Payday loans, because of their simplified pricing structure, do not contain hidden fees or charges.

Some states have laws limiting the number of loans a borrower can take at a single time. This is currently being accomplished by single, statewide realtime databases. These systems are required in Florida, Michigan, Illinois, Indiana, North Dakota, New Mexico, Oklahoma, and Virginia. These systems require all licensed lenders to conduct a real time verification of the customer’s eligibility to receive a loan before conducting a loan. Reports published by state regulators in these states indicate that this system enforces all of the provisions of the state’s statutes. Some states also cap the number of loans per borrower per year (Virginia), or require that after a fixed number of loan renewals, the lender must offer a lower interest loan with a longer term, so that the borrower can eventually get out of the debt cycle. Borrowers can circumvent these laws by taking loans from more than one lender if there is not an enforcement mechanism in place by the state. Some states allow that a consumer can have more than one loan outstanding (Oklahoma).

Federal regulation

In the US, although payday lending is primarily regulated at the state level, the United States Congress passed a law in October 2006 becoming effective on Oct. 1, 2007 that caps lending to military personnel at 36% APR as defined by the Secretary of Defense. The Defense Department called payday lending practices “predatory”, and military officers cited concerns that payday lending ruined low-paid enlisted men and women’s finances, jeopardized their security clearances, and even interfered with deployment schedules to Iraq.

Some federal banking regulators and legislators seek to restrict or prohibit the loans not just for military personnel, but for all borrowers, because the high costs are viewed as a financial drain on the working and lower-middle class populations who are the primary borrowers.