Federal regulators propose restrictions on payday lenders

NEW YORK – Federal regulators on Thursday proposed a significant crackdown on payday lenders and other high-interest loans, the first national attempt to tackle an industry widely seen as profiting the poor and desperate.

The proposals, if passed intact, have the potential to cause a nationwide contraction and restructuring of the $ 38 billion payday loan industry. Consumers desperate to borrow money quickly to cover an unforeseen expense might have a lane they once used is now closed, as traditional banks typically don’t provide this type of low-cost, short-term loan.

Payday loans are often seen as an exploitative and deceptive industry that traps desperate borrowers in debt cycles that can last for months. About half of all states either ban payday loans outright or have caps on the amount of interest payday lenders can charge, which often raise annual rates north of 300%. Google last month announced it would ban ads for payday loans, saying the industry creates “deceptive or harmful products.”

Colorado was a leader in payday loan reform, issuing regulations in 2010 that extended the repayment period from two weeks to six months. State regulations also put caps on loan amounts and interest rates charged.

Loans are widely used, in part because many Americans don’t have enough savings to cover an emergency, as shown in a poll released last month by the Associated Press-NORC Center for Public Affairs Research. About 12 million Americans take out a payday loan each year, according to The Pew Charitable Trusts, which has done extensive research on the industry. The average borrower takes out eight loans of $ 375 each per year, spending $ 520 in interest.

John Charette, 47, of Yarmouth, Maine, said payday loan outfits can come in handy for people like him who are divorced and have bad credit. He used RepubliCash in Portland to get a $ 250 loan to update his car’s expired registration, knowing that a police citation would cost even more.

“It’s going to fill the void,” Charette said, noting that he is unable to get a credit card. “It’s another credit option because I just don’t have it. “

The regulations proposed by the Consumer Financial Protection Bureau are intended to address common complaints about the payday lending industry. The proposal would also be the first national regulation of the payday lending industry, which had been largely left to states to regulate.

The CFPB suggests that lenders perform what is called a “full payment test”. Since most payday loans must be paid in full when they fall due, typically two weeks to a month after borrowing, CFPB wants lenders to prove that borrowers are able to repay that money without having to renew the loan. ready several times. There would also be restrictions on the number of times a borrower can renew the loan.

The CFPB would require lenders to give additional warnings before attempting to debit a borrower’s bank account, and also limit the number of times they can attempt to debit the account. The goal is to reduce the frequency of overdraft fees that are common among people who take out payday loans.

“Too many borrowers looking for a short-term cash flow solution are struggling with loans they cannot afford and are going into debt over the long term,” said CFPB director Richard Cordray, in a press release.

Cordray likened the situation to getting in a cab for a ride through town and getting stuck on a “terribly expensive” trip across the country. He said the proposal would seek to “prevent lenders from succeeding by failing borrowers”.

Payday lenders should give borrowers at least three days’ notice before debiting their account. In addition, if the payday lender attempts to collect the loan money twice without success, the lender will need to obtain written authorization from the borrower to attempt to debit their account again.

In a study released last year, the CFPB found that payday borrowers had to pay an average of $ 185 in overdraft fees and bank penalties caused by payday lenders trying to debit the borrower’s account.

Rosa Evans, 57, of Birmingham, Ala., Said she took out a car loan of around $ 1,000 five years ago and was struggling to pay it off when she lost her job .

“I tried to prevent them from having my car, but once I lost my job and… missed like two payments, they stopped calling and came to pick up my car,” she said. said outside of Easy Money, where signs on doors and windows advertise payday loans up to $ 500 and title loans up to $ 25,000. Evans was happy to hear about the proposed regulations and said they would be of great help to consumers in the event of a financial emergency.

The agency’s plan is likely to face stiff opposition from lobbyists in the payday lending industry and the auto title lending industry, as well as opposition from members of Congress. .

“The rule proposed by the CFPB is a blow to consumers because it will cut off access to credit for millions of Americans who use small loans to manage a budget deficit or unforeseen expenses,” said Dennis Shaul, CEO of the Community Financial Services Association. of America, which is a trade group for the payday loan industry.

According to the trade group, the new rules would wipe out 84% of the industry’s lending volume and likely shut down payday lenders’ storefronts.

Consumer advocates have had mixed reactions to the bureau’s proposal, with some saying the proposed restrictions don’t go far enough. Nick Bourke, project manager for small loans at Pew Charitable Trusts, said the rule for documenting a borrower’s ability to pay is good, but it ignores the high interest rates these products charge. often.

The agency is seeking comments from interested parties and the general public on the proposals before the publication of final regulations. Comments are expected by September 14. The final rules are expected to come into effect early next year.

Denver Post editor Alicia Wallace contributed to this report.