Payday loans are debt traps that need constraints


Payday lending industry argues that regulations would be “a staggering blow to consumers.”
Payday lending industry argues that regulations would be “a staggering blow to consumers.” NYT

The Consumer Financial Protection Bureau, an agency set up to curb the finance industry abuses that became so bitterly obvious with the Great Recession, wants payday lenders to make sure before granting a loan that borrowers can afford to pay them back.

Seems like common-sense business, right?

Not so, says Dennis Shaul, CEO of the Community Financial Services Association of America, a trade group for payday lenders. He says loan volume will drop 84 percent if this is the rule.

“Thousands of lenders, especially small businesses, will be forced to shutter their doors, lay off employees, and leave communities that already have too few options for financial services,” Shaul said in a statement released after the bureau announced its proposal last week.

Really? The industry will face disaster if people can’t be given unaffordable loans? Sounds like something is dreadfully wrong with the industry.

In fact, critics of the payday loan business have been citing its faults for years. It’s good to see some proposals to rein it in.

There are good arguments to be made for giving people access to small-dollar, short-term loans to meet unexpected expenses, especially people who don’t have easy access to other forms of credit.

But predatory lending is different.

Payday loans are usually due within two weeks, and they carry annual interest rates of around 390 percent.

The bureau says about 80 percent of payday borrowers cannot afford to pay off their loans when they are due, so they take out a new loan and incur new fees.

“It’s much like getting into a taxi just to ride across town and finding yourself stuck in a ruinously expensive cross-country journey,” said Richard Cordray, the agency’s director.

The bureau proposes a “full-payment test” under which lenders would be required to determine whether borrowers can afford the full amount of each payment, while still meeting basic living expenses and without new borrowing.

The new regulations, if finalized, would not take effect until next year.

Consumer advocates wanted an even tougher standard, limiting required loan payments to no more than 5 percent of the borrower’s gross income for the same period. The industry clearly wants no regulation.

Maybe the agency got it right.