Payday loans – and endless debt cycles – targeted by federal watchdog
For millions of cash-strapped consumers, short-term loans provide the means to cover urgent purchases or needs. But these deals, commonly referred to as payday loans, also contain triple-digit interest rates – and critics say borrowers often find themselves trapped in a cycle of high-cost debt.
Now the Consumer Financial Protection Bureau (CFPB) is preparing to unveil a framework of the proposed rules regulate payday lenders and other expensive forms of credit. The Federal Watchdog agency presents the proposals Thursday, the same day President Obama is in Alabama for a speech defending the agency and its work.
The new rules would likely affect consumers like Trudy Robideaux, who borrowed money from a payday lender in California to help cover an $ 800 auto repair. When she could not repay the money immediately, the lender offered to renew the loan for a fee.
“Ka-ching,” Robideaux said. “You’re addicted. You can feel the hook right in your mouth. And you don’t know it at that point, but it’s getting deeper and deeper.”
In no time, Robideaux reached out to other payday lenders, ending up shelling out thousands of dollars in fees.
“I had to buy one to pay for another,” she said. “It’s a real nightmare.”
When Robideaux first spoke to NPR in 2001, payday loans were a $ 14 billion industry. Since then, it has grown into a $ 46 billion company. Lenders have also embarked on other expensive forms of credit, such as loans in which a car title is used as collateral.
“What we want is for this credit to help consumers, not hurt them,” said Richard Cordray, director of CFPB. “What we’re finding is that consumers who are trapped in a cycle of debt – where they have to pay over and over again, expense after expense – are actually pretty damaging to consumers, and that’s what we’re concerned about. . “
Cordray suggests that one solution is to require lenders to make sure borrowers can pay off a loan on time, along with their other monthly expenses.
This type of review was a “fundamental principle” of traditional lending, Cordray said in remarks prepared for a field hearing in Richmond, Virginia. But many payday lenders “make loans not based on the consumer’s ability to repay, but on the lender’s ability to collect.”
Because payday lenders automatically have access to a borrower’s bank account, they can collect even when the borrower is out of breath.
“If you’re behind on existing bills, for any legitimate lender that’s a red flag,” said Michael Calhoun, president of the Center for Responsible Lending, a consumer advocacy group. “For payday lenders, this is often the mark of a vulnerable and profitable customer because they will be stuck.”
Payday lenders say they might be willing to accept an ability to pay test, as long as it’s not too costly or intrusive.
“It only makes sense to lend if you get your money back,” said Dennis Shaul, CEO of the Community Financial Services Association of America, a business group in the breakdown industry. “Therefore, the well-being of the customer is important. Now, the same goes for loyal customers. “
In fact, regular borrowers are at the heart of the payday business. Government researchers have found that 4 in 5 payday borrowers need to renew their loans, usually before their next paycheck. And 1 in 5 renewed at least seven times, with the cumulative fees often exceeding the amount originally borrowed.
Regulators are also considering alternatives to the ability to pay standard, including limits on the number of loan renewals, as well as mandatory repayment plans. Other proposed rules would crack down on costly collection practices, requiring lenders to notify borrowers three days before withdrawing money from their bank accounts and limiting the number of withdrawal attempts.
Wynette Pleas of Oakland, Calif., Was left with hundreds of dollars in overdraft fees after a payday lender repeatedly tried to collect her account.
“They make it look like it’s so convenient, but when you can’t pay it back, that’s when all hell breaks loose,” Pleas said.
The proposed regulations are still in their infancy and there will be a lot of step back. The industry has managed to evade past regulatory efforts, so Cordray says he wants the rules to be free from loopholes.
“We don’t want to go to all the effort to formulate rules and then find out that people are bending them,” he said.