Feds to crack down on payday lenders and the debt trap they set up

Sweeping new federal rules aimed at limiting payday loans are to be released in the coming days. But supporters of the crackdown say states must remain vigilant.

The new rules proposed by the Consumer Finance Protection Bureau are expected requiring lenders to verify key information about potential borrowers, such as their income, borrowing history and whether they can pay loan repayments. The bureau released draft rules last year for comment and is expected to release the final version this month.

Diane Standaert, payday loan expert for the Center for Responsible Lending, a reform advocate in North Carolina, calls the rule an “important first step” that recognizes the debt trap that short-term, low-interest loans high interest rates can create for low income people. people.

Payday loans are, as the name suggests, due the next payday. When that time comes, the lender immediately deducts the loan and fees from the borrower’s salary. In many cases, these fees are so high that the borrower cannot cover all their expenses for the next two weeks. So he turns to the payday lender for more money. According to the Center for Responsible Lending, it’s not uncommon for a $300 loan to be rolled over multiple times and ultimately cost over $800 in principal and interest.

Despite the new regulations, Standaert and others say state policymakers should stay on their toes. “We’ve seen this tendency for payday lenders to use activity at the federal level as an excuse to try to persuade state legislators to weaken [their own] consumer protection laws,” she says.

Indeed, when it became clear that the federal government would regulate payday loans, the industry stepped up its efforts to relax protections at the state level. Over the past two years, more than a dozen states have come under pressure to make laws more favorable to payday lenders. So far, all efforts have failed except in Mississippi, which has allowed car titles to be used as collateral in some types of short-term loans.

For example, payday loan company Advance America recently attempted in Oklahoma and several other states to create a new loan category for payday loans over $500. The new small loans offered could reach $1,500. But instead of being due in a few weeks or a month, borrowers would repay them monthly for up to 12 months – at an annual percentage rate (APR) of 204. That means a borrower could owe up to 3,600 $ in total payments over a year.

Payday loans are controversial, in part because lenders typically hide interest rates. For example, the lender may give 20% as the rate, hiding the fact that the rate is actually monthly. In other words, the APR is 240 percent. In comparison, credit card companies often charge an annual APR between 20-30%.

Other issues with payday loans include additional and difficult-to-understand check costs and fees.

While the new federal rules should help alleviate these issues, they still have shortcomings. For example, for short-term loans, the proposed rules would only apply after six loans.

It is unclear to what extent these new rules would help control the practice. To research showed that the most effective way to stop the potential harms of payday loans is to institute a rate cap. Price caps can only be set by states.

At the height of the industry, 42 states and the District of Columbia allowed high-interest loans, either by creating an interest rate cap exemption for short-term loans or by creating loopholes. Since 2001, however, six states and DC have repealed their payday loan exemptions, bringing the total to 15 states in which payday loans are now prohibited.

“The important role of states will continue as we expect payday lenders to continue their aggressive push,” Standaert said.