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Consumer watchdog targets payday loans

Ross D. Franklin / AP

Critics of payday loans say some customers wind up living off borrowed money at an annual interest rate of 400 to 600 percent or more.

Payday lending is now a $7 billion a year industry in the United States. Millions of Americans with limited income and no savings see this as their only way to get quick cash to pay for an unexpected expense. The market is so lucrative some traditional banks now offer their version of the payday loan, called a deposit advance. 

Some states limit the interest rate payday lenders can charge. A few states ban these loans. Payday lenders must also comply with federal law. But until now, there has been little federal oversight. That’s about to change. 

Last week, the Consumer Financial Protection Bureau held a hearing in Birmingham, Ala., on payday lenders. Richard Cordray, the CFPB’s newly-appointed executive director, said his agency will examine both bank and nonbank institutions offering these short-term, small-dollar loans.

“We recognize that there is a need and a demand in the country for emergency credit,” he said. “At the same time, it’s important that these products actually help consumers and not harm them. We know that some payday lenders are engaged in practices that present immediate risks to consumers and are illegal. Where we find these practices, we will take immediate steps to eliminate them.”

Payday loans are supposed to be short term: 14 days. As the name implies, they’re supposed to get you to the next pay day, when you’re able to repay the loan.

Here’s how it works. Let’s say you need $100 and the interest rate for that two week period is 17 percent. You write a postdated check made out to the lender for $117. If you can’t pay that amount when the two weeks is up, they keep $17, the loan is extended and another $17 fee is added on.

Critics say customers often roll-over their debt when they can’t repay it. They wind up living off that borrowed money at an annual interest rate of 400 to 600 percent or more.

Steven Stetson, a policy analyst with Alabama Arise, an anti-poverty group based in Montgomery, told the hearing people get “churned through the system” six, eight, 10 times a year.

“If we have laws against gouging for gas and water, we ought to have laws against gouging for loans,” he said.

In his opening remarks, Director Cordray said the CFPB planned to look into the long-term use of payday loans.  He talked about a consumer who had contacted the agency. The man took out a $500 loan to pay for car repair. But at the end of two weeks, he couldn’t repay the loan.

It’s been nine months and the borrower has paid $900 on that loan. He has $312 more to go. The money is withdrawn directly from his paycheck and now he doesn’t have enough left to pay his bills.

Other customers at the hearing spoke favorably about their experience. They wore “I Choose Payday Advance” stickers provided by the industry, the Associated Press reported.

LaDonna Banks said she needed the loan after she donated a kidney to her brother and couldn’t work.

“I borrowed the money. I paid back the money,” she said.

People who use payday loans tend to have less income, fewer assets and lower net worth than the average American family. They are disproportionately people of color. The industry insists it is serving people who are denied credit and shut out of the traditional banking system.  

Ted Saunders, CEO of Ohio-based Community Choice Financial (which operates in more than a dozen states), said he was offended by suggestions that payday lenders take advantage of people. Saunders believes the federal government should go after the “bad actors” in the business rather than creating new rules.

What do you think? The Consumer Financial Protection Bureau wants to hear from people who’ve used payday lenders. You can leave an anonymous comment on the CFPB website

More info:

Payday Loans Equal Very Costly Cash: Consumers Urged to Consider the Alternatives  

Associated Press contributed to this report.