Payday lenders can expect regulation soon
Payday lending is one of the few growth areas in financial services, but it’s likely to come under pressure now that the Consumer Financial Protection Bureau has set its sights on the industry.
In one of his first public appearances, the bureau’s recently appointed director, Richard Cordray, chaired a hearing on payday lending in a packed ballroom in Birmingham, Ala., Thursday. Birmingham has so many payday lenders – 93 by one count – that the City Council last month imposed a six-month moratorium on new ones opening.
Also on Thursday, the bureau published guidelines it will use to examine whether payday lenders, both banks and nonbanks, are complying with consumer financial laws.
“Fundamentally, I believe regulation is coming,” says FBR Capital Markets analyst Edward Mills, who attended the hearing. “The CFPB has clearly demonstrated that they mean business. They want to show they are doing things that are meaningful to the average consumer. I think they consider reforms to payday loans low-hanging fruit.”
How the loans work
Payday loans are short-term, small-dollar loans given to people who need cash to tide them over until their next paycheck.
To get one, the borrower needs a bank account and a source of income from a job or certain government benefits. Payday lenders don’t check credit scores, but they do check a database to make sure the borrower hasn’t defaulted on a payday loan.
The borrower writes a check to the lender and gets back the loan amount minus the lender’s fee. The loan amount is usually due when the borrower gets his next paycheck, usually within two to four weeks. If the borrower doesn’t repay the loan in cash by the due date, the lender cashes the check.
If the check bounces, “we employ the same type of collection procedures that any other retailer would use,” says Jamie Fulmer, a vice president with Advance America, Cash Advance Centers, one of the large publicly held payday lending chains.
Fulmer says if a customer cannot repay a loan on time, “we allow them to enter an extended payment plan that converts their loan into an installment loan they can pay off at no additional fee or accruing interest over four pay periods.”
Most states limit loan amounts and the fees or interest rates that lenders can charge. About 17 states have banned payday loans or effectively banned them by imposing strict interest rates or other limits.
In California, the maximum loan is $300 and the maximum fee is 15 percent of the amount of the check, up to a fee of $45.
That works out to an annual percentage rate of roughly 460 percent on a two-week loan or 215 percent on a 30-day loan. I visited several payday lenders in San Francisco, and these rates and terms are clearly spelled out in large posters.
Payday lenders say they help people who usually have no other access to credit cope with emergencies. They say their product is more economical than other alternatives, such as late fees on rent or bank overdraft or bounced-check fees.
‘Inherently unfair’
Consumer advocates say payday loans trap people in high-cost debt, in part because lenders don’t assess the borrower’s ability to repay. They say many users essentially borrow the same $300 over and over and pay a new fee each time, resulting in the exorbitant interest rates displayed on the posters.
“We think payday loans are an inherently unfair, deceptive and abusive product because they are designed to get consumers into a debt trap,” says Lauren Saunders, an attorney with the National Consumer Law Center.
Fulmer says his firm’s average borrower “uses our product seven to eight times per year,” whereas the average person who writes bad checks will bounce 13 in a year.
Of course, if the average payday customer is getting eight loans a year, some are getting far more, potentially one every pay cycle.
Article source: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2012/01/21/BU9B1MS93V.DTL
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