Federal regulator clamps down on payday lending
Resistance from GOP in Congress expected
NEW YORK — 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 havingtorenewtheloanrepeatedly. Theruleswould 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 allloansarerenewedatleastseven 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 industry, which operates more than 16,000 stores in 35 states, likely will see thousands of payday lending store closures nationwide. Regulation ofthesectorhasbeenlargelyleftto 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 succeed-
ing by setting up borrowers to fail,” CFPB Director Richard Cordray said in a statement.
While the industry might garner little sympathy from the public, there is an economic need for small-dollar, short-term loans. 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, like using pawn shops.
“The CFPB’S misguided rule will only serve to cut off their access to vitalcreditwhentheyneeditthemost,” said Dennis Shaul, chief executive of Community Financial Services Association of America, a trade group for the payday lending industry.
“The rule is not only misguided, it’s hideously complex for loans of a few hundred dollars.”
In addition to the “full payment test”andthelimitsonloanrenewals, 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 the overdrafts. Liberal-leaning consumer advocates, who have long pushed for additional regulations on the industry, cheered the decision.
“Payday and car title lenders profit from repeatedly dragging hardpressed people deeper and deeper intodebt,”saidlisadonnerwith Americans for Financial Reform. “Curbing the ability to push loans that borrowers clearly cannot repay is a key protection.”
But the payday lending industry has a significant lobbying presence in Washington, and Republicans tend to be hostile toward any regulations proposed by the CFPB, which was createdundertheobamaadministration.