Last fall, 450 consumer protection groups wrote to the Consumer Financial Protection Bureau (CFPB), asking for federal regulators to create nation-wide rules to regulate the lucrative payday loan industry. The groups said in their letter "it's time to end the scam." Now, the CFPB is taking up the challenge, trouble is, finding a way to make the rules stick.
Consumer groups sent a letter saying, "it's time to end the scam and put rules in place that will end abusive practices and slam shut the debt trap."
Payday loans have long been panned as an abusive lending product.
Pew Charitable Trusts' research showed that payday loans can have interest rates between about 200 percent to 500 percent, excessive to all lenders aside from loan sharks. Limiting those rates seems like one way to mitigate the debt trap.
Unfortunately, the CFPB is restricted by law from capping borrow's interest rates. Likewise, the same Pew research showed that a larger part of the payday loan business model is fees and rollover charges.
Take Lisa Engelkins as an example. According to the Center for Responsible Lending, Engelkins received $255 from a payday loan provider (a $300 loan with a $45 fee). She soon found herself trapped. Unable to repay the first loan in the first few weeks, she ended up having to take out another payday loan to repay the first, which included another $45 fee. The process repeated itself - 35 times.
She ended up paying $1,254 in rollover fees.
One thing the CFPB is considering is an "ability to repay" restriction. For instance, the Wall Street Journal reports that the CFPB might limit borrowers' payments to five percent of their monthly income, whether that includes fees is not clear.
Other groups believe that is not enough, and any "ability to repay" criteria for payday loans should include the borrowers monthly expenses.
Still, a spokesman for U.S. payday lender Advance America, fears that if overly strict regulations are put in place, it will "eliminate a viable credit option and drive them to miss bill payments, use overdraft programs, or turn to dangerous, illegally operating lenders."
Given the long history of organized crime in loan sharking, forcing people underground for much-needed cash could potentially be dangerous.
When federal bank lenders issued guidelines for "deposit advance" loans, similar to payday loans, Wells Fargo & Co, U.S. Bancorp and Regions Financial Corp quickly stopped offering the products.
In the case of payday loans, with entire shops dedicated to just those products, it's not clear if regulations would shutter the businesses or they'd be able to adapt.
Amy Cantu, another industry spokesperson, insists that any CFPB regulations would have to be fact-based.
"Assumptions about consumer harm from use of payday loans are just that—assumptions."
In any case, the industry may be in for some major changes this year.
[Image Credit: Jericho/Wikimedia Commons]