US Regulators Target Payday Loans for Unfair Practices

By Alan Zibel, The Wall Street Journal

05 January 15

 

.S. officials are taking their first crack at writing rules for payday loans, responding to concerns that the short-term, high-rate debt can trap consumers in a cycle of borrowing they can’t afford.

The Consumer Financial Protection Bureau is exploring ways to require payday lenders to make sure customers can pay back their loans, according to people familiar with the matter.

The bureau is seeking to establish the first federal regulations for the $46 billion industry, which has historically been overseen by states.

Payday loans are typically less than $500. Borrowers provide a lender with a personal check dated for the next payday or permission to debit their bank accounts two weeks later, with a finance charge added.

Consumer-advocacy groups say the loans are deceptive because borrowers often roll them over several times, racking up fees in the process. They also criticize high annual interest rates that can range from less than 200% to more than 500%, depending on the state, according to research by the Pew Charitable Trusts.

Early this year, the CFPB plans to convene a panel of small lenders to discuss its payday-loan plans, according to the people familiar with the matter. The bureau, like other federal agencies, is required to consider input from small businesses if regulations being developed are likely to have a significant impact on them.

Payday lenders say they make emergency cash available to people who may lack access to other forms of credit. New rules may leave those consumers with no other borrowing options, they say.

An overly strict set of rules would “eliminate a viable credit option and drive them to miss bill payments, use overdraft programs, or turn to dangerous, illegally operating lenders,” said Jamie Fulmer, a spokesman for Advance America, the largest U.S. payday lender.

Consumer advocates want the rules to be strict and are pushing the CFPB to require that lenders verify borrowers’ income, expenses and credit history before extending loans.

Payday loans and other similar lending products “simply dig borrowers into a hole,” more than 450 consumer groups from around the country wrote in a letter to Mr. Cordray last fall. “It’s time to end the scam and put rules in place that will end abusive practices and slam shut the debt trap.”

The CFPB is weighing whether to establish a category of “vanilla” short-term loans that would allow lenders to satisfy a new “ability to repay” requirement, the people said.

Such a requirement would emulate regulations that are already in place for mortgages and credit cards, and reflects a growing sentiment among regulators that formal underwriting requirements for varying loan types are needed to protect consumers.

Exactly how the CFPB would structure such a vanilla payday loan wasn’t immediately clear. But the regulator could establish requirements such as a minimum term that is longer than the typical two weeks.

A spokeswoman for the CFPB, which is expected to release its rule proposal later this year, declined to comment.

The CFPB also has been exploring whether to grant an exception from its ability-to-repay requirement for borrowers who get a small number of payday loans, the people said. It remains unclear how many loans would be allowed.

“Our central concern here is not with every payday loan made to a consumer,” CFPB Director Richard Cordray said last March in a speech in Nashville, Tenn. “Our concern instead is that, all too often, those loans lead to a perpetuating sequence.”

The CFPB also is studying ways to encourage banks and credit unions to offer short-term loans to consumers at lower rates, believing that banks could offer cheaper options to borrowers, the people familiar with the matter said.

Banks, however, have been exiting the short-term loan business. Last year, Wells Fargo& Co., U.S. Bancorp and Regions Financial Corp. stopped offering a product called “deposit advance” loans—similar to payday loans—after federal bank regulators issued guidelines saying lenders should assess borrowers’ ability to repay them.

Even without new regulations, the CFPB has been seeking to protect payday borrowers, citing concerns that they are being pressed into renewing their loans multiple times, paying more in fees than they originally borrowed.

In July, the bureau reached a $10 million settlement with payday lender ACE Cash Express after accusing the company of putting pressure on borrowers to take out a series of loans they couldn’t afford and using false threats of lawsuits or criminal prosecution. The company didn’t admit or deny the allegations and said it has policies in place to prevent delinquent borrowers from taking on additional debt.

Industry executives defend payday loans, saying they help borrowers in financial trouble get access to emergency cash. And industry groups are questioning whether the bureau has done enough research on the whether the loans benefit or harm consumers, setting the stage for a potential legal challenge.

The CFPB’s regulations “must rest upon a foundation of fact-based, data-driven conclusions drawn from objective research,” said Amy Cantu, spokeswoman for the Community Financial Services Association of America, which represents payday lenders. “Assumptions about consumer harm from use of payday loans are just that—assumptions.”

Unlike states, the bureau isn’t allowed to establish caps on interest rates, but has the power to deem industry practices unfair, deceptive or abusive to consumers. The regulator also must decide whether the rules should cover other forms of short-term borrowing such as loans secured by car titles.

Consumer advocates point to people like Michael Lake, 50, of San Diego as evidence borrowers need more protections. Mr. Lake took out two payday loans to pay off a car insurance deductible three years ago. Unable to pay back the loans, he took out four more, each from a separate payday loan shop. After making payments for two years, Mr. Lake says he was on the brink of financial collapse.

“I don’t think I would have gotten so far into debt if it wasn’t so easily accessible,” said Mr. Lake, who lives on $1,163 a month in disability income. He has been able to get out of financial trouble through a low-rate $1,600 loan from a local credit union, which paid off his payday loans.