The $46 billion payroll loan industry may soon face a crackdown if federal regulators at the Consumer Financial Protection Bureau (CFPB) get their way.
The relatively new government agency is expected to convene a panel of industry leaders sometime early this year to discuss the possibility of initiating national rules over the growing trade, which has traditionally been regulated at the state level.
The Cause for Concern
The CFPB is stepping in to look at possible federal regulations over the payday loan industry because of what’s seen as a need to make these loans easier for consumers to repay.
Consumer advocates have pointed out that payday loans, although small, often carry annualized interest rates that can hit a peak of 200% to 500%, making them quite difficult for low-income borrowers to repay.
Payday loans are typically issued in amounts of $500 or less to consumers. These loans usually involve the borrower agreeing to a direct debit from their bank account on their next payday to cover the loan and its associated fees. When that isn’t the case, borrowers give the lenders a check to be presented on the next payday.
The loans and their associated fees often cannot be repaid by consumers within the set time frame, creating what is seen by consumer advocates as a cycle of debt. This occurs when borrowers cannot afford to repay by their next payday and end up rolling over the loans and incurring more fees in the process.
Of particular concern to federal regulators are online payday lenders. These companies, consumer advocates say, have a greater ability to skirt state regulations for their industry.
While the industry remains under the regulation of states, both the Federal Trade Commission and CFPB have stepped in to sue payday lenders in the past for abusive practices.
ACE Cash Express, for example, was ordered to pay $10 million to settle accusations that it had used unfair debt collection practices that resulted in debtors borrowing more money to cover past loans.
Exactly what regulations, if any, the CFPB will seek to put into place remains unclear. The agency’s director, Richard Cordray, however, has indicated in the past a desire to see payday loan companies promote fair repayment of loans while other proponents of federal regulation have urged the spread of the cost of the loans over the life of the loan itself.
The CFPB was created as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The bureau is tasked with writing rules and enforcing federal consumer financial protection laws, among other duties.
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