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, including the Cleveland, Tenn.-based Check Into Cash – one of the largest privately owned payday lenders in America, with 980 storefronts in 30 states.
A payday lending group estimated Thursday that the new rules could cut 84 percent of the industry’s loan volume and likely result in payday lender storefronts closing. In Tennessee, the Department of Financial Institutions said there were 1,325 payday lending sites at the end of 2014, and the industry employed about 10,000 persons in the state.
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 ads 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, which 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 a payday lender 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.”
But others welcome more regulation. Candice Byrd, 29, is a former payday borrower who views payday lenders as rapacious and destructive. In 2011, while working a sales job, she took out a $500 loan from a storefront in Bloomington, Ill. to help cover a car payment that was due.
The loan had a six-week duration, but halfway through the period, the lender suggested that she roll it over into a new loan. “She was like, ‘You’re a good customer. This would be helpful for you,'” Byrd recalled. “It was the worst idea ever.”
The second loan set off a worsening cycle that lasted two years as Byrd borrowed repeatedly to cover the carrying costs on her mounting debt. Unable to pay her bills, she said, she lost her car and her apartment. To extricate herself, she walked away from her final two loans, leaving her credit report in tatters.
“These places want you to keep borrowing,” she said. “They don’t want you to climb out of the hole.”
The Consumer Financial Protection Bureau’s proposed regulations seek to tackle such 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.
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 an average of $185 in overdraft fees and bank penalties caused by payday lenders attempting to debit the borrower’s account.
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.
Critics of the new rules say they include hundreds of pages of regulations that will end up hurting people who need short-term credit for emergencies, often to keep working or to avoid even more expensive bank overdraft charges or utility penalties for non-payment.
“I think most people would be amazed that a Federal agency would propose 1,350 pages of rules for a $300 loan,” said Jabo Covert, vice president of government relations for Check Into Cash. “They seem to be asking us to go to more trouble to issue a $300 two-week loan than a bank would for a $150,000 30-year mortgage.”
Covert said the CFPB rules won’t change Check Into Cash plans in Tennessee or other U.S markets.
“We offer legal, regulated products that our customers want,” he said.
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.
Tennessee Citizen Action (TNCA), came out Thursday in support of the new rules, releasing a report that found that small dollar payday, auto title, and installment lenders regularly charge more than 300 percent interest and often trap millions of families in debt each year. Tennessee’s maximum interest rate for these loan shark loans is 460%, one of the highest in the country.
A recently-released study from the Center for Responsible Lending said payday and car title lenders are costing Tennessee families $400 million a year. Tennessee ranks 7th in the nation in the amount of money paid to short-term lenders.
“We are thrilled the CFPB has finally taken action to stop the deception and abuse that run rampant in the predatory payday lending industry,” said Andy Spears, executive director of TNCA.
Advocacy groups in Alabama are urging consumers to support the new federal proposal to tighten short-term lending regulations.
The Southern Poverty Law Center and Arise Citizen’s Policy Project are encouraging consumers to participate in the CFPB’s 90-day public comment period.
According to the Alabama State Banking Department, 1.7 million short-term loans have been taken out since August 2015.
Arise policy analyst, Stephen Stetson, says the proposals are a step in the right direction, but more attention is needed on high interest rates.
The CFPB 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.