With the payday lending boom of the 1990s, payday lenders found fertile ground and a healthy marketplace in Tennessee. To manage the new, bustling industry, the Tennessee legislature codified various rules and regulations. Tenn. Code Ann. § 45-17-101 et seq. At face value, Tenn. Code Ann. § 45-17-112(b) states that fees associated with payday loans “shall not exceed fifteen percent (15%) of the face amount of the check.” However, when one annualizes the 15% interest rate, the APR reaches a staggering 460%. Such a high APR should be no surprise, given that the average APR on payday loans among states without significant consumer-protective interest rate caps is roughly 447%. Additionally, under Tenn. Code Ann. § 45-17-112(o), lenders cannot issue loans exceeding $500 to any one consumer until repayment. Despite the introduction of myriad payday lending reform bills in the state legislature over the past few decades, Tennessee has taken a laissez-faire approach to the alternative lending industry compared to some other states. For example, while Tennessee and 30 other states pose no restrictive limitations on payday lenders, the other 19 states either expressly abolished payday lending or capped rates at a low enough rate to prevent profitability of payday lenders.
    
While traditional payday loans have commanded attention and engendered controversy among consumers, media outlets, and lawmakers, flex loans represent the new frontier in alternative banking. Moreover, Tennessee led the vanguard of alternative bank-friendly states in recognizing and regulating flex loans through the passage of the Flexible Credit Act in 2014. Tenn. Code Ann. 45-12-101 et seq. Although the flex loan is the progeny of the traditional payday loan, the two differ in several important ways. 

First, unlike payday loans that rely on post-dated checks of the debtor to repay, flex loans operate as hybrids of traditional payday loans and title loans. Specifically, depending on the creditor’s business model and/or the debtor’s income, the flex loan may be collateralized by either post-dated checks or vehicles. Tenn. Code Ann. 45-12-111. Second, while the maximum face value of a traditional payday loan shall not exceed $500, lenders can offer flex loans in an amount of up to $4,000. Third, and perhaps most importantly, Tenn. Code Ann. 45-12-111(b) prescribes a maximum interest of 24% per annum on flex loans. Yet, the statute also allows flex loan lenders to charge “customary fees” of up to 0.7% of the average daily principal balance. Annualizing these daily customary fees, together with the interest rate, the maximum allowable APR on flex loans in Tennessee is 279%.

Given the handful of failed attempts to regulate payday loans and the semi-recent espousal of flex loans, alternative banking is here to stay. It will take federal action to interrupt the otherwise thriving industry. Although federal agencies like the Consumer Financial Protection Bureau (“CFPB”) and the Federal Trade Commission actively root out bad actors in the lending industry who are in egregious violation of the Truth in Lending Act or the Fair Debt Collection Practices Act, expect no stringent rulemaking from the constitutionally embattled CFPB. The political outlook for reform at the congressional level is similarly unlikely. Although Congress capped interest rates for servicemembers at 36% in 2007, and despite the recent introduction of bills seeking to extend this cap to civilians, neither the current political makeup nor the respective political agendas afford an avenue of redress for the alternative banking industry. 

Gabe Martin is a 3L at the Lincoln Memorial University Duncan School of Law in Knoxville and articles editor of the LMU Law Review. His student note, “Federal Action to Cure State Inaction: Protecting Consumers From the Perils of Payday Lending,” will be published in the Law Review’s Spring 2023 issue. More information on the LMU Law Review, including its Feb. 3 symposium on the impact of media on the law, can be found here.