Bill targets payday lenders for federal regulation

McClatchy NewspapersApril 22, 2010 

WASHINGTON — Legislation being introduced Thursday in Congress would try to rein in payday lenders who offer short-term loans that often average to more than 400 percent annual percentage rates and, critics say, trap borrowers in ongoing cycles of debt.

The payday lending industry is worth $40 billion a year. The short-term loans are advertised as quick ways to get cash — usually a few hundred dollars — to tide borrowers over until their next paychecks.

Fees often are in the range of about $50 for a short-term loan of $200-$300.

"Right now payday lenders prey on people needing quick cash," said Sen. Kay Hagan, D-N.C. "They expect immediate repayment, typically within two weeks."

If borrowers are unable to make their payment, lenders offer the opportunity to take out more loans.

According to Hagan, 60 percent of payday lender customers have taken out at least 12 loans in the past year — meaning they likely are borrowing repeatedly.

Hagan, a former banker, will introduce legislation to regulate the industry from Washington.

The bill, called The Payday Lending Limitation Act of 2010, would modify the Truth in Lending Act. Hagan will introduce it as a separate measure Thursday, and again next week as an amendment to the financial regulatory overhaul bill making its way through the Senate.

Right now 16 states and the District of Columbia have passed limits on interest rates for short-term loans. They range from 17 percent to 60 percent.

The states are Arkansas, Arizona, Connecticut, Georgia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Vermont and West Virginia. Together, they include about a third of the U.S. population.

Payday lenders say their services extend credit to low-income people who otherwise might not have access to it. Such borrowers often lack bank accounts or consumer credit cards.

Steven Schlein, spokesman for the Consumer Financial Services Association of America, said payday lenders had nothing to do with the financial crisis and shouldn't be part of the congressional overhaul.

"We object to any regulation by the federal government, he said. "We're already regulated by the states."

He said lenders make thin margins now, totaling $6.5 billion in revenue annually through about 110 million loans.

"Any change to our product will eliminate the product, and then where will consumers get $300 loans?" Schlein asked.

Hagan's bill would limit borrowers to six payday loans in a 12-month period. That provision reflects a rule the Federal Deposit Insurance Corp. imposed on banks that allows them to make short-term, high-cost loans, but not for longer than three months at a time.

The bill also would require lenders to offer borrowers extended repayment plans beyond those six loans, at no extra cost to the borrower, and would allow the Federal Reserve to license payday lenders.

"It will protect borrowers by ensuring short-term cash advances actually remain short-term," Hagan said in an interview Wednesday.

A law passed in 2006 effectively prohibited payday lending among active military and their families. The law was pushed by the Defense Department because it saw the debt struggles of its military members as a national security risk.

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