Payday lending is big business in Florida, where nearly 8 million short-term, high-interest loans were processed last year. It's not that low-income Floridians are eager to pay annual interest rates in the triple digits; they often have no other option. The federal Consumer Financial Protection Bureau has proposed new rules to crack down on the industry's well-documented predatory practices. But to ensure that borrowers aren't left without a lifeline, the changes also should lead to new and better alternatives.
With their ubiquitous TV commercials, payday lenders like Amscot are everywhere in Florida. The Tampa Bay Times' Alli Knothe recently talked to two dozen Amscot customers in Tampa about how and why they use payday loans. For most, the loans are only for emergencies. A recent survey that found that 47 percent of Americans can't afford an unexpected $400 expense shows there's widespread need for quick cash.
That's what payday lenders offer: small loans, to be paid back within a month, with exorbitant interest rates and fees attached. If a single month's fees weren't bad enough, most payday borrowers end up taking out loans month after month, unable to get caught up, and often pay more in fees than the amount borrowed. It's a disastrous strategy for people with the least to spare.
A 2001 Florida law governing payday loans sets a $500 borrowing limit and a $10 cap on transaction fees, limits borrowers to one loan at a time and creates a statewide database to keep tabs on the loans. But it doesn't go far enough. The proposed federal rules would add restrictions on lenders taking fees directly and repeatedly from customers' bank accounts, a particularly pernicious cycle for borrowers who also get hit by bank fees.
The proposed rule change that shows the most promise is a requirement that lenders check borrowers' ability to repay. Payday lenders currently do little more than verify that a borrower has a source of income and a bank account to plunder. They don't compare the amount a borrower is taking out against his or her monthly expenses like rent or a mortgage payment, which is a step that any traditional bank or credit union would take before approving a loan. That means banks and credit unions — which could offer similar loans but at more reasonable interest rates — can't compete.
Critics say the "ability to repay" requirement in the proposed rules is too vague and has too many exemptions. Other observers want to see a cap on loan payment amounts based on a customer's income. These suggestions should be given serious consideration as the Consumer Financial Protection Bureau accepts comments on the draft rules through early November.
Low-income Floridians facing emergencies or unexpected shortfalls need to be able to borrow money quickly. But they also need rescuing from the payday loan industry that preys on their desperation. The Consumer Financial Protection Bureau has a solid framework on the table to begin reining in the industry's worst practices. When finalized, the new rules should also bring needed competition so that vulnerable borrowers have options.