Any regulation of the payday loan industry is welcome. Consumers should be shielded from loans that look short-term but come with triple-digit interest rates and trap borrowers in long-term debt. Federal banking regulators are on the verge of telling big banks to stop their worst practices, and that's good news. The industry has operated with few constraints for too long.
There are 1,300 payday lenders in Florida, and many of them operate from storefronts in less affluent communities. But there are also a handful of banks willing to risk their reputations to do what amounts to legal usury, including Wells Fargo Bank, U.S. Bank, Regions Bank, Fifth Third Bank, Guaranty Bank and the Bank of Oklahoma. Their practices have drawn the attention of the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., both of which have proposed new rules to protect consumers. One essential change is that banks would have to first determine whether a borrower has the ability to repay the principal and interest charges of payday loans — rules that are similar to mortgage requirements under the Dodd-Frank financial reform law. This change alone would help keep borrowers from being caught in cycles of debt.
Bank payday lenders say they are providing a needed service, but the industry profits from people who are financially unsophisticated and vulnerable. Seniors represent more than a quarter of payday borrowers, according to the Center for Responsible Lending. Just like storefront payday lenders, banks charge high interest rates of up to 300 percent. The loans operate off a bank checking account. Borrowers take "advances" from their directly deposited paychecks, disability or Social Security checks. Banks then first repay themselves along with interest and origination fees.
Problems for borrowers arise when they don't have enough money left to pay their monthly expenses and must take out another loan. And if borrowers' accounts can't cover the loan, overdraft fees start piling up. Payday loan borrowers are about twice as likely to face them, according to the center.
To stop this churning, regulators are expected to require a 30-day cooling-off period. No loan could be offered to a borrower until 30 days after all prior loans are paid off. And consumers would have to be given clear and accurate information on interest rates, something that doesn't always happen now.
Richard Cordray, director of the Consumer Financial Protection Bureau, recently called payday and direct-deposit loans "debt traps." All of this regulatory attention is a hopeful sign that payday loans may finally be reformed.