Hill Democrats Eye Curbs on Payday Loans
Democratic lawmakers, voicing concern about predatory lending practices, are pushing for new restrictions on the burgeoning payday loan industry.
In both chambers, Democrats are proposing legislation that would tightly regulate how and to whom short-term, high annual-interest loans could be offered. Options include capping loan interest rates, placing new limits on issuing cash advances and prohibiting banks and credit unions from making or financing payday loans.
Due in part to banking deregulation, the payday lending industry has exploded over the past decade, particularly in poor and minority communities. Payday lenders offer quick cash with little or no collateral, while charging high interest rates. The short-term loans are often due when borrowers receive their next paycheck. Lenders typically charge $15 for every $100 borrowed, which is the equivalent of a 390 percent annual interest rate.
Some key Democratic lawmakers believe the loans unfairly target those who can least afford high interest rates. The Defense Department has listed payday lending as one of the top 10 priority issues facing military families.
“We still must act to prevent the exploitation of working families that are short on cash, due to unexpected medical expenses or other needs, from unscrupulous lenders,” Sen. Daniel Akaka (D-Hawaii) said in a statement.
Akaka, whose state includes a large number of military families, intends to introduce two bills in March offering new payday lending regulations bills. They would be similar to measures he sponsored in the 109th Congress.
One would prohibit payday lenders from issuing cash advances, if the check used as collateral is drafted on a federally insured bank or credit union.
It also would prohibit banks and credit unions from making payday loans directly or making loans to other lenders to finance payday loans.
A second measure would authorize grants to provide low-cost, short-term loans. Federally insured banks and community development financial institutions would be subject to interest rates set by the National Credit Union Administration’s loan interest rates, typically 36 percent.
The Senate Banking, Housing and Urban Affairs Committee may hold hearings on the issue. The panel already has held hearings on predatory lending practices related to the housing market.
In the House, Rep. Bobby Rush (D-Ill.) chairman of the House Energy and Commerce subcommittee on commerce, trade and consumer protection is expected to reintroduce legislation that would prohibit loans by lenders who do not comply with state payday loan laws. It also would prohibit such short-term loans with interest rates that exceed 36 percent.
Rep. Tom Udall (D-N.M.) also is expected to reintroduce legislation that would regulate “rent-a-banks” that partner with payday lenders to make single-payment and installment loans. It also would require the Federal Reserve Board to study the best way to require advertising of the finance charge and the annual percentage rate, and the inclusion of a high-interest warning label on applications for credit with annual percentage rates higher than 36 percent.
So far, payday loans primarily have been regulated on the state level, with 13 states so far banning such loans. Last year, Congress passed a law capping the annual interest rate charged on those loans to military personnel at 36 percent.
The Community Financial Services Association of America, a trade group that represents the payday lending industry, opposes the changes and argues the sector has taken steps to regulate itself. The trade group announced plans last week to offer borrowers extended payment plans, which would give them two to four additional months to repay loans without accruing more interest or new fees.
Consumer groups, however, consider the extended payment plan insufficient.
Jean Ann Fox, director of consumer protection at the Consumer Federation of America said, “We consider this public relations, not consumer protection.”
Fox said if CFSA really wants to protect consumers, they need to dramatically overhaul what they offer, primarily by charging more reasonable interest rates.
Opponents of new regulations, however, note the Federal Reserve Bank of New York issued a report last month concluding that payday lending is not predatory.
“We find that in states with higher payday loan limits, less educated households and households with uncertain income are less likely to be denied credit, but are not more likely to miss a debt payment. Absent higher delinquency, the extra credit from payday lenders does not fit our definition of predatory,” the report said.