Federal regulator clamps down on payday lending
Payday and auto title lenders will have to adhere to stricter rules that could significantly curtail their business under rules finalized Thursday by a federal regulator. But the first nationwide regulation of the industry is still likely to face resistance from Congress.
The Consumer Financial Protection Bureau’s rules largely reflect what the agency proposed last year for an industry where the annual interest rate on a payday loan can be 300 percent or more. The cornerstone
is that lenders must now determine before giving a loan whether a borrower can afford to repay it in full with interest within 30 days.
A key goal is to prove that
borrowers, who are often in dire financial situations, are able to pay without having to renew the loan repeatedly. The rules would set limits on the number of times a borrower could renew. Because studies by the CFPB have found that about 60 percent of all loans are renewed at least once and that 22 percent of all loans are renewed at least seven times, this cap is likely to severely wound the industry’s business model. In California, the largest payday loan market, repeat borrowers made up 83 percent of the industry’s loan volume.
The CFPB estimated that loan volume in the payday lending industry could fall by 55 percent under the new rules. The industry, which
operates more than 16,000 stores in 35 states, will likely see thousands of payday lending store closures nationwide. Regulation of the sector has been largely left to the states, 15 of which effectively ban payday lending or auto title lending due to the caps on interest rates.
“Too often, borrowers who need quick cash end up trapped in loans they can’t afford. The rule’s common-sense ability-to-repay protections prevent lenders from succeeding by setting up borrowers to fail,” CFPB Director Richard Cordray said in a statement.
But the principal trade group for the payday lending industry, the Community Financial Services Association of America, denounced the CFPB rules and said they will unduly limit credit to those most in need of shortterm cash.
“This federal small-dollar lending rule is a tremendous blow to the more than 1 million Americans who spoke out against it during last year’s comment period,” said Dennis Shaul, CEO of the payday lending trade group. “The CFPB’s misguided rule will only serve to cut off their access to vital credit when they need it the most. The rule is not only misguided, it’s hideously complex for loans of a few hundred dollars.”
In addition to the “full payment test” and the limits on loan renewals, the CFPB rules would also restrict the number of times a payday lender can attempt to debit a borrowers’ account for the full amount without getting additional authorization. This is because many payday loan borrowers end up overdrafting their bank accounts, which in turn incurs fees. Or worse, they end up having to close their bank accounts because of all the overdrafts.
Allan Jones, president of the Cleveland, Tenn.-based Check Into Cash chain of more than 1,100 payday lending stores across the country, said Thursday he was not surprised by the board’s regulatory proposal, which he said “is the next step in a very long process.”
“The rule does not become effective for approximately 24 months,” Jones said in a statement. “During that time we will continue to evolve our product selections and make further refinements to better serve our customers. “
Roughly 12 million people took out a payday loan in 2010, according to the Pew Charitable Trusts. And there’s a concern that those who use payday loans might turn to other high-cost ways of making ends meet, such as using pawn shops.