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  1. Opinion

Editorial: Stronger payday loan rules protect borrowers

New rules on payday loans, though they contain loopholes that should be tightened, are a forceful step in stopping predatory lenders from gouging consumers.
New rules on payday loans, though they contain loopholes that should be tightened, are a forceful step in stopping predatory lenders from gouging consumers.
Published Jul. 1, 2016

The Consumer Financial Protection Bureau has unveiled new rules regulating short-term, high-interest loans intended to help protect the most financially vulnerable Americans from spiraling into deep debt. The rules, though they contain loopholes that should be tightened, are a forceful step in stopping predatory lenders from gouging consumers. They should be beefed up and adopted.

Payday lenders operate under a business model of extracting as much money as possible from borrowers so they will keep borrowing and never catch up. Contrast that with traditional banks, whose goal is to secure good loans that will ultimately be paid off.

The evidence of these damaging practices is clear. Most payday borrowers take out seven to 10 loans a year at interest rates that soar above 300 percent. They commonly end up paying more in fees than the original amount borrowed.

The proposed rules, which also apply to car title loans, are straightforward and sensible and would enhance Florida's inadequate law governing payday loans. Passed in 2001, the state law 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. The new federal rules would go further in some cases. Among the key provisions:

Requirements for determining a borrower's ability to repay. Payday lenders do little more now than verify that a borrower has income. The new rule would require lenders to check customers' credit and take into account living expenses when evaluating the ability to pay back a loan. Florida's law has no such requirement.

Fee crackdown. Many payday loans give lenders access to customers' bank accounts for automatic payment collection. When there aren't sufficient funds in the account, the borrower is hit with penalty fees on top of those issued by the bank. The new rules require notice before lenders can debit money, and they restrict how many times the lenders can keep trying to take money — and charge another fee when it's not there.

The rules face a review period, during which consumer groups and others can submit ideas for improvement. There's ample room for it. As written, the regulation requiring lenders to evaluate borrowers' ability to pay, while badly needed, is too vague and has numerous exemptions.

Perhaps most important, a proposal to cap payments on short-term installment loans at 5 percent of a borrower's gross income was dropped from the current draft. The Pew Charitable Trusts, which studies payday loans, notes that such a provision would bring traditional banks into this piece of the short-term loan market, making it more competitive with better rates. Without the 5 percent cap, Pew notes, a $400 three-month loan from a payday lender would carry $360 in fees. The same loan from a bank would cost $50 to $60 in fees.

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The rules portend a major shake-up to the payday loan industry, which frankly needs rattling. The earth already has started to move. Google recently banned ads for payday loans, saying it wanted to protect users from "deceptive or harmful financial products." The heat is being felt in the political arena, too. U.S. Rep. Debbie Wasserman Schultz, D-Weston, was under heavy fire for taking money from payday lenders. She backed a bill in the House that would have blocked the Consumer Financial Protection Bureau's new rules, but she reversed course and now supports them.

The Consumer Financial Protection Bureau is on the right track with a framework of regulations that have the potential to make a real difference for consumers. With the political wind at their backs, regulators should make the rules as robust as possible in the interest of borrowers who can least afford to waste money.