Payday-Lending Rules Near as U.S. Agency Sees Debt Traps

The U.S. Consumer Financial Protection Bureau is in the “late stages” of writing rules on short-term lending after finding the business draws consumers into loans they can’t afford, according to its director.

“The business model of the payday industry depends on people becoming stuck in these loans for the long term, since almost half their business comes from people who are basically paying high-cost rent on the amount of their original loan,” CFPB Director Richard Cordray said in remarks prepared for a field hearing in Nashville today.

Cordray said the bureau is now formulating “new rules to bring needed reforms to this market,” without specifying the agency’s plans.

Restrictions on payday lending may affect firms including Advance America Cash Advance Centers Inc., a unit of Grupo Elektra SAB; Cash America International Inc. (CSH); EZ Corp. (EZPW); Community Choice Financial Inc. and Ace Cash Express Inc.

Payday loans can be for as little as $100 and are pitched to cash-strapped borrowers as a means to tide them over until their next paycheck. Traditionally secured by a post-dated check, loans now made online require borrowers to authorize direct debits from a bank account.

After factoring in fees which can be $20 per $100 borrowed, interest rates on a payday loan can reach 521 percent on an annual basis, the consumer bureau has said.

Consumer groups, including the Durham, North Carolina-based Center for Responsible Lending, have said the payday lending industry -- which exists in about 25 states -- couldn’t survive without the borrowers who fall into the trap of rolling over expensive loans.

Consumers Cautioned

Jamie Fulmer, senior vice president of public affairs at Advance America, said that his company gets positive feedback from its customers about payday loans.

“We caution consumers that payday advances should not be used as a long-term solution for budget management,” Fulmer said in an e-mail. “But how can anyone predict the number of times someone might face a financial crisis in any given year?”

Cordray said CFPB’s research concluded that about 20 percent of payday loans result in a “loan sequence” that involves seven or more loans. Since fees are about 15 cents on the dollar, these consumers will pay more in costs than in principal.

“For these people, the piling up of fees eclipses the actual payday loan itself,” Cordray said.

Some states, such as Washington and Kentucky, limit the number of payday loans a person can have in a given time period, usually a year. Others impose cooling-off periods, such as 14 days, in which a borrower can’t get another loan. Loan renewal rates in states with such limits are “nearly identical” to states without them, according to Cordray.

“Even if state law precludes consumers from taking out another payday loan immediately, the pressure of their circumstances -– now intensified by the heavy expense of the payday loan itself -– tends to force consumers to find their way back to the payday lender about as soon as the law permits,” Cordray said.

To contact the reporter on this story: Carter Dougherty in Washington at cdougherty6@bloomberg.net

To contact the editors responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net Anthony Gnoffo

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