Federal Regulators to Crack Down on Unaffordable Payday Loans

The New York Times reported Monday that federal regulators are expected to draft new rules to govern short-term loans, including car titles and payday loans, which to date have fallen mostly under the jurisdiction of individual state law. While many states have tried to put an end to short-term loans with exorbitant interest rates, payday lenders have found ways to get around these laws or have lobbied state legislatures to soften regulations.

“Such maneuvers by the roughly $46 billion payday loan industry, state regulators say, have frustrated their efforts to protect consumers,” the Times reports.

According to the report, the Consumer Financial Protection Bureau (CFPB) will soon take the first step by federal regulators to reduce the number of unaffordable loans lenders can make. The CFPB, created after the 2008 financial crisis, is an independent agency tasked with protecting consumers in the financial sector. Along with banks and credit unions, payday lenders fall within the agency’s jurisdiction.

In March 2014, the CFPB released a startling report on the realities of payday loans and the effect they have on low-income households and borrowers, the demographic payday lenders target most. The people lenders seek out are in desperate financial situations, and therefore do not thoroughly consider all the facts before signing up for these loans, the fees of which may end up being more than the initial principal.

The initial loan is typically a 14-day loan of no more than $500, though some can exceed this amount. According to the CFPB, these loans carry fees between $10 to $20 for every $100 borrowed.

“A $15 fee, for example, would carry an effective APR of nearly 400% for a 14-day loan,” CNN Money reports.

The CFPB found that over 60 percent of all payday loans are made to individuals who take out 7 or more loans in a row, meaning the accumulated fees end up being more than the initial amount taken out.

“The bureau found that during a 12-month period, borrowers took out a median of 10 loans,” the Times reports. “Borrowers paid median fees of $458. The median amount borrowed was $350.”

People may recall the Montel Williams commercials for Money Mutual where he makes it sound like short-term loans are the most convenient solution for people who are having money problems and live paycheck to paycheck. Yet, according to the CFPB, these loans are only convenient for people who can pay them back immediately or after no more than one renewal.

For those who can’t, the challenge becomes getting out from under the debt.

“[O]ne Pennsylvania woman who took out a total of $800 in payday loans to help pay for rent after losing her job told the CFPB that she meant for the loan to be only short-term,” the CNN Money article says. “But after rolling over her first loan and eventually taking out another one to help pay for it, she has already paid more than $1,400 towards the debt and still owes more.”

There are currently 35 states that do not have laws regulating short-term lenders. However, even among the states that have made these types of payday loans illegal or have limits in place, lenders have found ways to get around the laws by reclassifying their stores as car-title lenders or using other similar tactics. New rules by the CFPB could make it harder for these companies to get around state regulations and could protect consumers in states that do not currently have these laws.

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