A recent report from the Pew Charitable Trusts’ Safe Small-Dollar Loans Research Project showed that Americans who use payday loans pay an average of $520 per year in fees. As CNN Money noted, “Over the course of two weeks — when payday loans typically come due — fees averaged $15 per $100 borrowed, amounting to a 391% annual percentage rate. ”
These predatory loans suck borrowers into a vicious cycle known as “churning,” which is repeat borrowing by customers who manage to pay off their previous loan, but require another due to interest and fees. The poorest Americans are increasingly using payday loans to pay for basic necessities, including food and elctricity.
And some members of Congress want to make it even easier for these loans to proliferate by removing state regulations that protect consumers from some of the payday loan industry’s practices:
A bipartisan team of House lawmakers is pushing new legislation that would allow nonbank lenders, including those typically known as payday lenders, to choose to operate under a federal charter and avoid dealing with a patchwork of often conflicting state laws. [...]
The new federal charter would carry some specific rules, including prohibitions against loan periods shorter than one month – longer than the two-week period of a traditional payday loan. Firms also couldn’t make loans they don’t believe the consumer can repay or hit consumers with fees for repaying early. But consumer advocates say none of these rules would prevent lenders from engaging in what they see as harmful lending practices such as charging triple-digit interest rates.
The legislation, for instance, would bar regulators from capping the interest rate or fees that nonbank lenders could charge for loans made under the federal charter, which would allow these lenders to evade state usury laws.
Big banks wanted very much the same thing during the debate over the Dodd-Frank financial reform law, asking for state consumer protection laws to be preempted by national regulations. Major banks, including Wells Fargo and Bank of America, finance billions of dollars worth of payday lending.
Payday lenders have been throwing an increasing amount of money at Congress in recent years. In this instance, lawmakers seem to be giving the industry exactly what it wants.