Payday Lending: New Rules Proposed

If you have issues with payday lending, please give me a call. This article from the Columbus Dispatch outlines the latest in how government is trying to limit the type of lending that can cause consumers to fall into a spiral of debt.

Cordray clamping down on payday lenders; some still want new Ohio law

Payday and auto title lenders will have to adhere to stricter rules that could significantly curtail their business under rules finalized Thursday by a federal regulator, but the new restrictions are likely to face resistance from Congress.

The Consumer Financial Protection Bureau’s rules largely reflect what the agency proposed last year for an industry where the annual interest rate on a payday loan can be 300 percent or more. The cornerstone is that lenders must now determine before giving a loan whether a borrower can afford to repay it within 30 days.

A key goal is to prove that borrowers, who are often in dire financial situations, are able to pay without trapping them in a cycle of debt, having to renew the loan repeatedly.

The rules, which are to take effect in 21 months, would limit the number of times a borrower could renew. Studies by the consumer bureau have found that about 60 percent of all loans are renewed at least once and that 22 percent of all loans are renewed at least seven times.

A study by Pew Charitable Trusts found that payday lenders in Ohio can charge the highest fees in the nation. Ohio lawmakers have mostly ignored the issue since they approved, and voters affirmed, what turned out to be largely meaningless restrictions in 2008.

Lenders avoided that law’s 28 percent loan interest rate cap by simply registering as mortgage lenders or credit-service organizations. That has allowed them to charge an average 591 percent annual interest rate on the short-term loans.

According to Pew, Ohioans who borrow $300 from a payday lender pay, on average, $680 in interest and fees over a five-month period — the typical time a borrower is in debt on what is supposed to be a two-week loan.

The CFPB estimated that loan volume in the payday lending industry could fall by 55 percent under the new rules. The industry, which operates more than 16,000 stores in 35 states, will likely see thousands of store closures nationwide.

“Too often, borrowers who need quick cash end up trapped in loans they can’t afford. The rule’s common-sense ability-to-repay protections prevent lenders from succeeding by setting up borrowers to fail,” said bureau Director Richard Cordray in a statement.

State Rep. Kyle Koehler, R-Springfield, who is pushing for tighter payday lending laws in Ohio, said he expects the payday industry will try to overturn the rules.

“It’s a rule. It can be changed,” Koehler said. “I don’t want Ohio to be beholden to rules in Washington to fix this issue.”

In March, Koehler and Rep. Michael Ashford, D-Toledo, introduced House Bill 123, which would allow short-term lenders to charge a 28 percent interest rate plus a monthly 5 percent fee on the first $400 loaned — a $20 maximum rate. Monthly payments could not exceed 5 percent of a borrower’s gross monthly income.

The bill has not had a single hearing, but Koehler said he plans to meet next week with Speaker Cliff Rosenberger, R-Clarksville, to discuss it.

“We’ve been doing everything leadership has asked us to do. Now we’re going to push for some hearings,” Koehler said.

Those efforts, he said, have included a roundtable discussion with borrowers and lenders and bringing in borrowers to talk to GOP leadership.

Koehler, noting he has 27 payday stores in his district per 100,000 people, said he knows people need access to small-loan credit.

“This bill will not shut down payday lending in Ohio,” he said. “That’s the biggest misconception. It’s just going to make it more affordable for people are getting trapped in these loans.”

Roughly 12 million people took out a payday loan in 2010, according to Pew. There’s a concern that those who use payday loans might turn to other high-cost ways of making ends meet, such as pawn shops.

“The CFPB’s misguided rule will only serve to cut off their access to vital credit when they need it the most,” said Dennis Shaul, chief executive of Community Financial Services Association of America, a payday loan trade group. “The rule is not only misguided, it’s hideously complex for loans of a few hundred dollars.”

U.S. Sen. Sherrod Brown praised the rule, saying it will “crack down on shady payday lenders” and “help put an end to their abusive practices.”

The new rules also would restrict the number of times a payday lender can attempt to debit a borrowers’ account without getting additional authorization. This is aimed at reducing overdraft fees.

But the payday lending industry has a significant lobbying presence in Washington and Ohio, and Republicans tend to be hostile toward regulations proposed by the consumers bureau, which was created under the Obama administration.

Before Thursday, the only federal regulation that applied to the payday lending industry was a restriction on loans to servicemen and women. The bureau’s rules imply that it wants banks and credit unions to take over the small-dollar lending industry.

Kalitha Williams, policy liaison for Policy Matters Ohio, called it a “strong rule.”

“Ohio is ground zero for the worst abuses and has the most expensive and highest usage of payday lending in the country,” she said.