NEW YORK (AP) — Federal regulators proposed a significant clampdown on payday lenders and other high interest loans on Thursday, the first nationwide attempt to address an industry widely thought of as taking advantage of the poor and desperate.
The proposals, if enacted intact, are likely to cause a nationwide contraction and restructuring of the $38 billion payday loan industry. Consumers desperate to borrow money quickly to cover an unexpected expense might have an avenue they once used now closed, since mainstream banks generally don't provide these kinds of low-dollar, short-term loans.
Payday lending is often thought of as an exploitive, deceptive industry that traps desperate borrowers in cycles of debt that can last for months. Roughly half of all states ban payday lending outright or have caps on how much payday lenders can charge in interest, which often carry annual rates north of 300 percent. Last month Google announced it would ban ad for payday loans, saying the industry creates "misleading or harmful products."
The loans are used widely, partly because many Americans do not have enough savings to cover an emergency , as seen in a poll released last month by The Associated Press-NORC Center for Public Affairs Research. Roughly 12 million Americans take out a payday loan each year, according to The Pew Charitable Trusts, who has done extensive research on the industry. The average borrower takes out eight loans of $375 each per year, spending $520 on interest.
John Charette, 47, of Yarmouth, Maine, said the payday loan outfits can be helpful for people like him, who's divorced and has bad credit. He used RepubliCash in Portland to get a $250 loan to update the expired registration on his car, knowing a police citation would be even more expensive.
"It's going to fill in the gap," Charette said, noting that he's unable to get a credit card. "It's another avenue for credit because I simply don't have it."
The Consumer Financial Protection Bureau's proposed regulations seek to tackle common complaints about the payday lending industry. The proposal would also be the first nationwide regulation of the payday lending industry, which had largely been left to the states to regulate.
The CFPB is proposing that lenders must conduct what's known as a "full-payment test." Because most payday loans are required to be paid in full when they come due, usually two weeks to a month after the money is borrowed, the CFPB wants lenders to prove that borrowers are able to repay that money without having to renew the loan repeatedly. There would also be restrictions on the number of times a borrower can renew the loan.
The CFPB would require that lenders give additional warnings before they attempt to debit a borrower's bank account, and also restrict the number of times they can attempt to debit the account. The aim is to lower the frequency of overdraft fees that are common with people who take out payday loans.
"Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt," CFPB Director Richard Cordray said in a prepared statement.
Cordray compared the situation to getting into a taxi for a crosstown ride and finding oneself stuck on a "ruinously expensive" trip across the country. He said the proposal would aim to "prevent lenders from succeeding by setting up borrowers to fail."
Payday lenders would have to give borrowers at least three days' notice before debiting their account. Also, if the payday lender attempts to collect the money for the loan twice unsuccessfully, the lender will have to get written authorization from the borrower to attempt to debit their account again.
In a study published last year, the CFPB found that payday borrowers were charged on average $185 in overdraft fees and bank penalties caused by payday lenders attempting to debit the borrower's account.
Rosa Evans, 57, of Birmingham, Alabama said she took out an auto title loan for about $1,000 five years ago and was working toward repaying it when she lost her job.
"I tried to stop them from getting my car, but once I lost my job and ... missed like two payments, they stopped calling and just came and got my car," she said outside of Easy Money, where signs on the doors and windows advertise payday loans of up to $500 and title loans of up to $25,000. Evans was glad to hear about the proposed regulations and said they would be a huge help to consumers during financial emergencies.
The agency's plan is likely to face stiff opposition from lobbyists from the payday lending industry and auto-title lending industry, as well as opposition from members of Congress.
"The CFPB's proposed rule presents a staggering blow to consumers as it will cut off access to credit for millions of Americans who use small-dollar loans to manage a budget shortfall or unexpected expense," said Dennis Shaul, CEO of the Community Financial Services Association of America, which is a trade group for the payday lending industry.
According to the trade group, the new rules would eliminate 84 percent of the industry's loan volume and would likely result in payday lender storefronts closing.
Consumer advocates had mixed reactions to the bureau's proposal, some saying the proposed restrictions do not go far enough. Nick Bourke, director of the small-dollar loans project at the Pew Charitable Trusts, said that the rule to document a borrower's ability to pay is good, but it does not address the high interest rates these products often charge.
The agency is seeking comments from interested parties and the general public on the proposals before final regulations are issued. Comments are due by Sept. 14. The final rules are likely to go into effect early next year.