Time for federal intervention to rein in wily payday lenders

Plenty of predatory payday lend- ers hit pay dirt by profiting from people’s pain.

For years, critics have lodged that general complaint against the growing $46 billion short-term cash-advance business in this country. For just as long, payday loan institutions have used their wiles to thwart attempt after attempt after attempt by state governments and other regulators to rein in their practices, some of which have widely been viewed as unfair, abusive and deceptive.

In Ohio, for example, the conflict has been longstanding. In 2008, two-thirds of Ohio voters approved an initiative upholding a payday-loan reform law that capped annual percentage rates at 28 percent, down from rates as astronomically high as 400 percent. Not to be defeated, the payday industry reinvented itself by registering under state mortgage-lending laws. In so doing, they managed to assume new legal identities but keep their same questionable practices and same sky-high interest rates.

Then last year, the Ohio Supreme Court supported the industry by ruling that its practice is legal, overturning an appeals court verdict. Other states’ attempts to clamp down on payday lenders have met with similar results that fly in the face of consumer protection.

Fortunately, this nation’s new Consumer Financial Protection Board, led by highly capable former Ohio Attorney General Richard Cordray, has decided enough is finally enough. Earlier this month, the CFPB announced its plans to release in the near future a first draft of proposed federal regulations to govern short-term loan businesses.

Such action is long overdue. As Cordray noted in hearings on storefront lenders last year, “The business model of the payday loan industry depends on people becoming stuck in these loans for the long term. Most of the industry’s revenue comes from keeping borrowers on the hook and getting them to pay fees that very often dwarf the amount of the original loan.”

EVIDENCE MOUNTS

Independent analyses validate Cordray’s assertions. According to a report from the nonprofit Policy Matters Ohio, the network of 1,600 payday lenders in the state, including about 100 in the Mahoning Valley, often charge even higher annual rates (for example, nearly 700 percent for a two-week loan) than they did before the state’s reforms. In addition, other brands of high-cost lending, such as auto-title loans, have moved into the state using similar practices.

In a nationwide study by the Pew Charitable Trust, researchers found that “12 million people [used] payday loans annually, spending an average of $520 in interest to repeatedly borrow an average of $375 in credit.”

Clearly, then, for many people, payday loans create long-term hindrances in their efforts for short-term help. Borrowers end up sinking deeper and deeper into a debt trap. The proposed federal regulations could at last offer a nationwide blanket of protection. Speculation on the content of the regulations centers on capping interest rates at a level around 30 percent, punishing lenders found guilty of unfair and deceptive collection practices and limiting the number of consecutive payday loans clients could seek.

Cordray notes, however, that a nationwide ban on such institutions won’t be in the cards, even though 12 states have done just that. He rightly argues that there always will be a need for emergency loan assistance and that not all payday lenders are guilty of consumer maltreatment.

Nonetheless, too many Americans have suffered too much misery at the hands of predatory payday-lending practices. The time for strong federal intervention is now.