Tougher rules needed on payday loans

The federal Consumer Financial Protection Bureau, after several years of study, on Thursday announced its plan to put some controls on the payday loan industry, which collects about $7 billion in fees annually from 15 million Americans, mostly from those who are low-income, are strapped for cash or have few other options in a financial emergency.

And that may include more people than you might think. A poll last month by the Associated Press and NORC Center for Public Affairs Research found significant numbers of Americans who said they would have difficulty scratching together the cash to cover a $1,000 emergency, such as an unexpected medical bill, appliance failure or vehicle repair. Three-quarters of people in households making less than $50,000 a year and two-thirds of those making between $50,000 and $100,000 said they would have difficulty covering a $1,000 unexpected bill, the survey reported.

Naturally, payday loan businesses, which typically require only a checking account and a pay stub, are easy to turn to in those situations. But for many, the high-interest payday loans turn into a debt trap, forcing people to take out one loan after the other to pay off the earlier loan, its interest and meet other expenses.

So the CFPB’s announcement that it was seeking a rule to address the loans seemed like welcome news. Unfortunately, the federal agency’s proposed rule, even though it faces court challenges by the industry and legislation in Congress, doesn’t go far enough to protect the public, a charge specifically leveled by the Pew Charitable Trusts, which also has been studying the payday loan industry for many years.

The federal agency’s rule would require that payday lenders verify the borrower’s income and their ability to repay the money that they borrow, a vague standard that doesn’t begin to address the exorbitant interest rates that are charged, typically 400 percent.

Fortunately, Washington state residents have better protection against the usury practiced by the industry. Legislation passed in 2009 limits payday loans to a maximum of $700 at any one time. And a borrower can’t take out more than eight loans in a 12-month period. Fees are limited to 15 percent on amounts of $500 or less, with an additional 10 percent on amounts over $500 — still a significantly high interest rate.

Previously, Pew has credited Washington state with some of the strongest protections in the nation, and argued against failed legislation in 2015 that sought to change the state’s rules.

As mild as the CFPB’s proposal is, the industry has claimed it will force businesses to close and leave communities with fewer lending options. That’s unlikely; payday lenders still do well enough in Snohomish County even under the state’s rules. Moneytree has six offices in the county, among several other similar businesses.

Beyond the income verification, Pew called on the Consumer Financial Protection Bureau to also institute a rule that would limit monthly installment payments to 5 percent of a borrower’s paycheck. Some banks and credit unions were preparing to offer such loans, Pew said, which would allow customers to repay loans in a reasonable amount of time and at rates that are six times lower than the typical payday loan.

Under Pew’s proposal, a $400 loan, paid back over three months, would cost the borrower $50 to $60 in total fees. That’s an option that many in this state would welcome.

Many are in need of loans to pay for unexpected expenses, but taking out such a loan shouldn’t force families into debt that for many creates a harsher financial hardship than the original emergency.