Federal regulation of the payday loan industry is on the table, andhas all sides seething.
Short-term payday loans, often for $500 or less, typically are due on the borrower’s next paycheck, with lenders given post-dated checks or access to the borrower’s checking account. Finance charges range from $10 to $30 for every $100 borrowed, so a two-week loan with a $15 fee per $100 borrowed equates to an annual percentage rate of nearly 400 percent.
In announcing its proposal in June, the Consumer Financial Protection Bureau (CFPB) cited its serious concerns that risky lender practices were “pushing borrowers into debt traps.” That’s because within a month, almost 70 percent of payday loan borrowers take out a second loan, and one in five new borrowers ends up taking out at least 10 or more loans, paying more fees and interest on the same debt.
The agency’s proposed rules would not prohibit all payday, auto title or other high-costs loans, but they would require lenders to adopt stricter standards to determine if consumers have the ability to repay.
If the proposed rule is allowed to stand as now written, “there is no question we will sue the CFPB on several different grounds,” Dennis Shaul, CEO of the Community Financial Services Association of America (CFSA) told CBS MoneyWatch. The proposal is “unwarranted” and exceeds the authority given to the CFPB by Congress, he argued.
Consumer advocates also want to see changes in the proposed rule, noting that the rules will let payday loans with interest rates of 300 percent or more to continue, while discouraging banks and credit unions from entering the market with lower-cost loans that could save millions of borrowers billions of dollars.
Researchers at Pew Charitable Trusts’ small-loan project say consumers’ needs would be best served if the CFPB reinserted an initial provision that would have capped payments on the loans at 5 percent of a borrower’s monthly income.
The agency removed that piece of its proposal amid aggressive lobbying by payday lenders, effectively taking banks and credit unions out of the equation, said Alex Horowitz, senior officer with the project. “Without that provision, lower-cost loans would be effectively prohibited,” he said.
The agency’s proposal does not address what consumers want: lower prices, smaller installment payments and quick approval, added Horowitz.
People who resort to payday lenders find themselves “hit by a mountain of debt and no way to repay it,” Massachusetts Senator Elizabeth Warren, D-Massachusetts, told a gathering of consumer advocates last week.
“It is critical for people to submit comments pushing for the strongest possible rule, as the industry is doing everything it can to weaken it,” said Warren of the Oct. 7 cutoff for public comment.
As Friday’s deadline nears, Shaul’s group is highlighting the record volume of public comment, saying it illustrates how much consumers object to the perceived limits the proposal would place on their ability to obtain payday loans.
Pointing to more than 172,000 responses the CFPB has received, “the vast majority of comments appear to represent the concerns customers have over the negative effect this rule will have on their ability to access credit,” Shaul’s group said late last month.
But consumer advocates are crying foul, saying the public comment submissions repeat an alarming number of identical passages.
“There is something fishy here,” said Karl Frisch, executive director of the nonprofit Allied Progress, which is calling on the CFPB to closely scrutinize the submissions, saying many purporting to be from individuals relaying personal stories contained identical sentences and paragraphs.
Frisch, a former Democratic strategist, also pointed to newspaper stories recounting how borrowers were being asked to submit comments supportive of the industry as part of the loan process, a scenario the CFSA’s Shaul dismisses as not coming with any “coercion or direction from us.”
Cincinnati-based Axcess Financial, which operates Check ‘n Go and Allied Cash Advance stores, forwarded to the CFPB notes written by its customers, Cleveland.com reported. Roughly 800 additional comments were submitted to the agency by customers of Nashville-based Advance Financial, some as simple as: “I have bills to pay,” or “Leave me alone,” the newspaper recounted.
In Shaul’s view, the agency started its look at the industry with a jaundiced eye, ignoring the needs of working Americans living paycheck to paycheck, who need help when an unexpected emergency crops up.
The industry serves 14 million to 17 million customers a year, and “not all of them can be labeled as having a bad experience,” he argued.
Citing statistics showing some 40 percent of American households can’t put together $1,000 in a crisis, it stands to reason that a portion of the population would “periodically use this product to make ends meet,” Shaul said. “One month they may use a payday loan, another month defer a bill, and another month go to a relative.”
Others, including Warren, concurred with Shaul that Americans confronting household and other emergencies do need access to credit but said the payday loan industry only exacerbates the problem.
The payday lending business model is one dependent on snaring borrowers in a relentless cycle of debt, a scenario Warren likens to “throwing bricks to a drowning man.”
The CFPB attempted to stay out of the fray, with a spokesperson saying the agency “welcomes the extensive feedback” it has received so far and is working to process and publish the comments as efficiently as possible.
The payday loan industry today is subject to regulation at the state level, where battles are also being waged.
In March, an Arizona lawmaker called on the state attorney general’s office to look into the Arizona Financial Choice Association, saying it had misled consumers and legislators in working for a bill that would have legalized loans with annualized interest rates as high as 200 percent.
Lawmakers ultimately rejected the bill.