Cordray clamps down on payday lenders
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 new restrictions are likely to face resistance from Congress.
The Consumer Financial Protection Bureau’s rules largelyreflectwhattheagency proposed last year for an industry where the annual interest rate on a payday loan can be 300 percent or more. Thecornerstoneis that lendersmustnowdetermine beforegivingaloanwhethera borrower can afford to repay it within 30 days.
A key goal is to prove that borrowers, who are often in dire financial situations, are able to paywithout trapping theminacycleofdebt, having torenewthe loan repeatedly.
Therules, whicharetotake effect in 21 months, would limit the number of times a borrower could renew. Studies by the consumer bureau havefoundthatabout60percent of all loans are renewed at least once and that 22 percent of all loans are renewed at least seven times.
A study by Pew Charitable Trusts found that payday lenders in Ohio can charge the highest fees in the nation. Ohio lawmakers have mostly ignored the issue since they approved, and voters affirmed, what turnedouttobelargelymeaningless restrictions in 2008.
Lenders avoided that law’s 28 percent loan interest rate cap by simply registering as mortgage lenders or credit service organizations. That has allowed them to charge anaverage591percentannual interest rate on the shortterm loans.
According to Pew, Ohioans who borrow $300 from a payday lender pay, on average, $680 in interest and fees over a five-month period — the typical time a borrower is in debt onwhat is supposed to be a two-week loan.
The CFPB estimated that loan volume in the payday lending industry could fall by 55 percent under thenew rules. The industry, which operates more than 16,000 stores in 35 states, will likely see thousands of store closures nationwide.
“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 lendersfromsucceeding by setting up borrowers to fail,” said bureauDirector Richard Cordray in a statement.
State Rep. Kyle Koehler, R-Springfield, who is pushing for tighterpayday lending laws in Ohio, said he expects the payday industry will try to overturn the rules.
“It’s a rule. It can be changed,” Koehler said. “I don’t want Ohio to be beholden to rules in Washington to fix this issue.”
InMarch, KoehlerandRep. Michael Ashford, D-Toledo, introduced House Bill 123, which would allow shortterm lenders to charge a 28 percent interest rate plus a monthly 5 percent fee on the first $400 loaned— a $20 maximumrate. Monthlypayments could not exceed 5 percent of a borrower’s gross monthly income.
Thebill has nothada single hearing, but Koehler said he plans to meet nextweek with Speaker Cliff Rosenberger, R-Clarksville, to discuss it.
“We’ve been doing everything leadership has asked us to do. Now we’re going to push for some hearings,” Koehler said.
Thoseefforts, hesaid, have included a roundtable discussionwithborrowersandlenders and bringing in borrowers to talk toGOPleadership.
Koehler, noting he has 27 payday stores in his district per 100,000 people, said he knows people need access to small-loan credit.
“This bill will not shut down payday lending in Ohio,” he said. “That’s the biggest misconception. It’s just going to make it more affordable for people are getting trapped in these loans.”
Roughly 12 million people took out a payday loan in 2010, according to Pew. There’s a concern that those who use payday loans might turn to other high-costways of making ends meet, such as pawn shops.
“The CFPB’s misguided rule will only serve to cut off their access to vital credit when they need it the most,” said Dennis Shaul, chief executive of Community Financial Services Association of America, apayday loan trade group. “The rule is not only misguided, it’shideouslycomplex for loans of a few hundred dollars.”
U.S. Sen. Sherrod Brown praised the rule, saying it will “crack down on shady payday lenders” and “help put an end to their abusive practices.”