How the government aims to protect low-income users of payday loans

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By JOSH BOAK

AP Economics Writer WASHINGTON (AP) — Every month, more than 200,000 needy American households take out what’s advertised as a short-term loan.

Many ran out of money between paychecks. So they get a “payday” loan to help out. The problem is that these loans can often bury them under fees and debts. Their bank accounts can be closed, their cars seized.

The Consumer Financial Protection Bureau proposed rules on Thursday to prevent Americans from falling into what it calls a “debt trap.” At the heart of the plan is the requirement that payday lenders verify borrowers’ income before approving a loan.

The government seeks to set standards for a multi-billion dollar industry that historically has only been regulated at the state level.

“The idea is common sense: if you lend money, you have to first make sure the borrower can afford to pay it back,” President Barack Obama said in a speech prepared for a speech at Birmingham, Alabama. “But if you’re making that profit by trapping American workers in a vicious cycle of debt, then you have to find a new way of doing business.”

The payroll industry warns that if the rules are enacted, many poor Americans would lose access to all credit. The industry says the CFPB should further study the needs of borrowers before setting additional rules.

“The office is looking at things through the lens of one size fits all,” said Dennis Shaul, chief executive of the Community Financial Services Association of America, a trade group for businesses that offer small-dollar short-term loans. or salary advances.

But this lens also reveals disturbing images.

Wynette Pleas of Oakland, Calif., says she endured a nightmare after taking out a payday loan in late 2012. A 44-year-old mother of three, including a blind son, Pleas borrowed $255 to make the groceries and pay the electric bill.

But as a part-time nursing assistant, she only worked limited hours. Pleas told her lender that she would not be able to meet the two-week deadline for the loan. The lender then attempted to withdraw the repayment directly from his bank account even though Pleas was low on funds. The result: a $35 overdraft fee and an NSF cheque.

After the incident repeated itself five more times, Pleas said the bank closed his account.

Collection agencies began phoning Pleas and his family. About six months ago, she learned that the $255 loan had ballooned to a debt of $8,400. At that time, she risked prison.

“It’s not even worth it,” said Pleas, who is trying to rebuild her finances and her life.

About 2.5 million households received a payday loan in 2013, according to an analysis of census data by the Urban Institute, a Washington-based think tank. The number of households receiving such loans has jumped 19% since 2011, even as the US economy has recovered from the Great Recession and hiring has steadily improved.

“These are predatory lending products,” said Greg Mills, senior research fellow at the Urban Institute. “They rely on people’s inability to pay them to drive vendor fees and profits.”

The rules would not only apply to payday loans, but also to vehicle title loans – in which a car is used as collateral – and other forms of high-cost loans. Before extending a loan due within 45 days, lenders should ensure that borrowers can repay all debt on time. Income, borrowing history and other financial obligations should be checked to show that borrowers are unlikely to default or renew the loan.

Generally, there would be a 60 day “cooling off period” between loans. And lenders should provide “affordable repayment options”. Loans could not exceed $500, impose multiple finance charges or require a car as collateral.

The CFPB has also proposed similar rules to regulate long-term, high-cost loans with repayment terms between 45 days and six months. The proposals would cap either interest rates or repayments as a share of income.

All rules will be reviewed by a panel of small business representatives and other stakeholders before the bureau reviews the proposals for public comment and then finalizes them.

The proposals follow a 2013 CFPB analysis of payday loans. For an average loan of $392 that lasts just over two weeks, borrowers were paying in fees the equivalent of an annual interest rate of 339%, according to the report.

The median borrower was earning less than $23,000 – below the poverty line for a family of four – and 80% of loans were rolled over or renewed, leading to higher fees. Over 12 months, nearly half of payday borrowers made more than 10 transactions, meaning they had either rolled over existing loans or borrowed again.

“They end up trapping people in longer-term debt,” said Gary Kalman, executive vice president of the nonprofit Center for Responsible Lending.

Several states have tried to curb payday loans. Washington and Delaware limit the number of loans a borrower can take out each year, according to a report by the Center for Responsible Lending. Arizona and Montana have capped annual interest rates.

But other states have looser oversight. In Texas, payday companies filed 1,500 complaints against borrowers to collect money between 2012 and mid-2014, according to Texas Appleseed, a social justice nonprofit.

Industry officials say states are better able to regulate lending, ensuring consumers can be protected while lenders can also experiment with new products.

“We think the states are doing a good job regulating the industry,” said Ed D’Alessio, executive director of the Financial Service Centers of America. “They come up with a standard where the laws governing the industry have gone through the legislative process.”

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Associated Press writer Nedra Pickler contributed to this report from Birmingham, Alabama.

Copyright 2015 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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