Payday Loan Regulations
Payday loans are quite popular in states in which they are legal, and many folks take them out in the hopes of getting themselves out of a tight financial spot. Unfortunately, positive payday loan experiences are negatively impacted by high interest rates, among other things. In response to public criticism of their onerous fees and penalty interest charges, recent regulatory changes have made payday loans both fairer and more difficult to secure. The following primer outlines the most pertinent of these.
Efforts to Cap Interest Rates
The loudest criticism of payday lending concerns the industry’s high interest rates. Since most payday loans are taken out for the short-term, typical fees of $15 or $20 per $100 borrowed seem like an acceptable burden for most borrowers. If annualized, however, these rates can be jaw-dropping: 300 to 500 percent is the norm, with rates spiking to nearly 1,000 percent in some states when penalty interest is taken into account.
With Congress and federal regulatory agencies issuing conflicting statements on the issue, some states have taken matters into their own hands. In Missouri, for example, a currently-pending ballot initiative aims to cap annualized rates on payday loans at 36 percent. Montana’s state legislature has already passed a law instituting a cap at the same rate, and Idaho’s is expected to take up the matter shortly.
New Federal Regulations
The recent creation of the federal Consumer Financial Protection Bureau heralds several important changes for the payday loan industry. Some of its decrees include:
- Truth-in-lending statements. Payday lenders are now required to provide their customers with “truth-in-lending” documents that spell out, in annualized fashion, a precise summation of their interest rates. The problem is, payday lenders often hand out these documents in sealed envelopes to borrowers already on their way out the door. That’s not exactly transparent.
- Limitations on outstanding loans. Payday lenders are now required to receive full payment for an outstanding loan before they issue a new one to the same customer. This eliminates the “rollover” problem, wherein interest charges are magnified as unpaid loan balances and are then rolled into new loans.
- Better accountability. Payday lenders must now keep detailed records of their outstanding and current loans so that auditors can detect patterns in their lending practices and uncover evidence of illegal activity. This has virtually eliminated a once-common arrangement in which payday lenders cashed their customers’ post-dated collateral checks early in order to collect fees for non-sufficient funds.
The Consumer Financial Protection Bureau has put the payday lending industry on notice that it may be the target of future action, including a “compliance examination” to investigate whether it fits within the Bureau’s definition of “abusive lending practices.” If it is found to be out of compliance with new federal regulations, the practice may be curbed even further than it is currently or banned outright.
Payday lending’s proponents have a point when they argue that it provides a valuable service to low-income workers who need extra cash to cover everyday expenses. New regulations have changed the industry for the better in recent years, making it more transparent and reducing the overall cost of payday loans. Since more may be done, keeping up on new regulatory developments is essential for anyone who regularly uses the industry’s services.