Tighter payday loan rules intended to shield debtors
WASHINGTON — Troubled by consumer complaints and loopholes in state laws, federal regulators are putting together the first rules on payday loans aimed at helping cash-strapped borrowers avoid falling into a cycle of high-rate debt.
The Consumer Financial Protection Bureau said state laws governing the $46 billion payday lending industry often fall short and that fuller disclosures of the interest and fees — often an annual percentage rate of 300 percent or more — may be needed.
Details of the proposed rules, expected early this year, would mark the first time the agency has used the authority it was given under the 2010 Dodd-Frank law to regulate payday loans. In recent months, it has tried to step up enforcement, including a $10 million settlement with ACE Cash Express, accusing the payday lender of harassing borrowers to collect debts and take out multiple loans.
A payday loan, or a cash advance, is generally $500 or less. Borrowers provide a personal check dated on their next payday for the full balance or give the lender permission to debit their bank accounts. The total includes charges often ranging from $15 to $30 per $100 borrowed. Interest-only payments, sometimes referred to as “rollovers,” are common.
Legislators in Ohio, Louisiana and South Dakota unsuccessfully tried to broadly restrict the high-cost loans in recent months. According to the Consumer Federation of America, 32 states now permit payday loans at triple-digit interest rates, or with no rate cap.
“Our research has found that what is supposed to be a short-term emergency loan can turn into a long-term and expensive debt trap,” said David Silberman, the bureau's associate director for research, markets and regulation.
The agency is considering options that include establishing tighter rules to ensure a consumer has the ability to repay. That could mean requiring credit checks, placing caps on the number of times a borrower can draw credit or finding ways to encourage states or lenders to lower rates.
Payday lenders say they fill a vital need for people who hit a rough financial patch. They want a more equal playing field of rules for both nonbanks and banks, including the way the annual percentage rate is figured.
“We offer a service that, if managed correctly, can be very helpful to a diminished middle class,” said Dennis Shaul, chief executive of the Community Financial Services Association of America, which represents payday lenders.