WASHINGTON – Troubled by consumer complaints and loopholes in state laws, federal regulators develop first payday loan rules to help cash-strapped borrowers avoid falling into a cycle of interest rate debt raised.
The Consumer Financial Protection Bureau says state laws governing the $ 46 billion payday loan industry are often insufficient, and more comprehensive disclosures of interest and charges – often an annual percentage rate of 300% or more – may be needed.
Full details of the proposed rules, expected early this year, would mark the first time the agency has used the authority given to it under the Dodd-Frank Act of 2010 to regulate payday loans. In recent months, he has attempted to ramp up enforcement, including a $ 10 million settlement with ACE Cash Express after accusing the payday lender of harassing borrowers to collect debts and take out multiple loans.
A payday loan, or a cash advance, is usually $ 500 or less. Borrowers provide a personal check dated their next payday for the total balance or authorize the lender to debit their bank accounts. The total includes fees often ranging from $ 15 to $ 30 per $ 100 borrowed. Interest-only payments, sometimes referred to as “rollovers”, are common.
Lawmakers in Ohio, Louisiana and South Dakota have tried unsuccessfully to curtail high-cost loans widely in recent months. According to the Consumer Federation of America, 32 states now allow payday loans at triple-digit interest rates or without any rate caps.
The CFPB is not authorized by law to cap interest rates, but it can find industry practices unfair, deceptive or abusive to consumers.
“Our research has shown that what is supposed to be a short-term emergency loan can turn into a long-term and expensive debt trap,” said David Silberman, associate director of the office for research, markets and regulation. The office found that over 80% of payday loans are renewed or followed by another loan within 14 days; half of all payday loans are in a sequence of at least 10 loans.
The agency is considering options that include setting stricter rules to ensure a consumer has the ability to pay back. This could mean requiring credit checks, putting a cap on the number of times a borrower can get credit, or finding ways to encourage states or lenders to lower rates.
Payday lenders say they are filling a vital need for people going through bad financial times. They want a level playing field for non-banks and banks, including how the annual percentage rate is calculated.
“We provide a service that, if managed properly, can be of great benefit to a diminished middle class,” said Dennis Shaul, general manager of the Community Financial Services Association of America, which represents payday lenders.
Maranda Brooks, 40, a records coordinator at a college in Cleveland, says she took out a $ 500 loan from her bank to help pay an electric bill. With “no threat of loan sharks coming to my house, breaking the kneecaps,” she joked; Brooks accepted the $ 50 fee.
Two weeks later, Brooks says she was surprised to see the $ 550 deducted from her regular salary of $ 800. To cover expenses for herself and her four children, she took out another loan, in a cycle of debt that lasted almost a year.
“It was a nightmare to go around in circles,” said Brooks, who believes lenders could do more to help borrowers understand the fees or offer lower-cost installment payments.
Last June, the Ohio Supreme Court upheld a legal maneuver used by payday lenders to circumvent a 2008 law capping the interest rate on payday loans at 28% per year. For comparison, annual percentage rates on credit cards can range from around 12-30%.
Members of Congress are also considering payday loans.
Ohio Senator Sherrod Brown, the top Democrat on the Senate Banking, Housing and Urban Affairs Committee, is considering legislation that would allow Americans to receive a prepayment of part of their tax credit on income instead of a payday loan.
Senator Elizabeth Warren, D-Massachusetts, wants the U.S. Postal Service to offer low-cost check cashing and small loans. The idea is contested by many banks and seems unlikely to advance in a Republican-controlled Congress.