Payday lenders warn that proposed new rules could hurt consumers

Payday lenders make about $38.5 billion in loans a year. Above, a sign for Wisconsin Auto Title Loans in Madison, Wis.
(Ryan J. Foley / Associated Press)

Payday lenders complained loudly that tough new federal regulations proposed for their industry would force many operators to shut down and leave cash-strapped consumers with fewer options for getting short-term loans.

“It’s apparent to me that literally hundreds of businesses would be so adversely affected by this that they would be put out of business,” said Dennis Shaul, chief executive of the Community Financial Services Assn. of America, a trade group for an industry that makes about $38.5 billion in loans a year.

But President Obama said Thursday that the new regulations from the Consumer Financial Protection Bureau would protect consumers from predatory lending that often forces borrowers to take out more loans to repay existing ones, eventually spending more on fees that the original loan amount.


Obama expressed little sympathy for companies that couldn’t live within the proposed restrictions.

“As Americans, we believe there’s nothing wrong with making a profit,” Obama said in touting the work of the bureau during an appearance at an Alabama community college. “But if you’re making that profit by trapping hardworking Americans in a vicious cycle of debt, then you need to find a new way of doing business.”

The bureau, created by the 2010 Dodd-Frank financial reform law, has been looking into the payday loan industry for three years amid complaints of abuses from consumer advocates.

Use of payday and other short-term, high-interest loans, such as those secured by an automobile title, increased during the Great Recession and its aftermath as more Americans ran short of money to pay bills.

At a hearing Thursday, bureau Director Richard Cordray unveiled proposed regulations that would require lenders to determine a borrower’s ability to repay upfront or make repayment more affordable, such as by limiting the number of loans a customer could take out in a given period of time.

“Extending credit to people in a way that sets them up to fail and ensnares considerable numbers of them in extended debt traps is simply not responsible lending,” Corday said at the hearing in Richmond, Va.


“It harms rather than helps consumers,” he said. “It has deserved our close attention, and it now leads to a call for action.”

The hearing was the first step in the bureau’s efforts to collect input from the industry and consumer advocates on the proposal. In the coming weeks, the bureau will convene a panel of small lenders to get their feedback and then formally propose regulations on which the public could comment.

Consumer groups generally praised the proposed regulations.

“These reforms would protect consumers against repeat rollovers or refinancing of loans because that can lead to more fees and costs, trapping consumers in debt and draining their limited resources,” said Pamela Banks, senior policy counsel for Consumers Union.

She and other consumer advocates, however, warned that one of the options for lenders does not require them to determine a borrower’s ability to repay before making a loan. They urged the bureau to make such a determination mandatory.

Payday lenders already take steps to determine whether customers can repay, said Lisa McGreevy president of the Online Lenders Alliance trade group.

“Everybody loses if the borrower defaults,” she said. “A belief that a loan will be repaid is a basic tenet of lending.”


The industry’s average loan of about $350 typically tides a borrower over until payday. Altogether, with lenders operating out of about 20,000 locations nationwide, the industry collects about $8.7 billion annually in interest and fees.

Shaul, the Community Financial Services chief, said he was disappointed with the proposed regulations and accused the bureau of being biased against payday lenders.

“Often what I see here is the tendency to accept at face value the criticism of payday lending ... from our adversaries without determining if there is truth to them,” he said.

He and other payday lending industry representatives promised to work with the bureau to try to improve the proposal, which they said would harm their businesses and consumers if changes were not made.

“Customers will lose many of the credit options currently available to them,” said Edward D’Alessio, executive director of Financial Service Centers of America, another industry trade group.

By describing payday loans as leading to a debt trap, the bureau suggested consumers aren’t smart enough to make decisions about their own money, he said during Thursday’s hearing.


“Our customers are intelligent and responsible and make difficult but rational financial decisions every single day based on their own judgments of what’s right for them,” D’Alessio said.

Without payday lenders, which already are regulated by the states, Americans would have to seek money “from informal and even nefarious sources.”

Dozens of employees of payday lending companies attended the hearing, many wearing yellow stickers declaring “Equal Access, Credit for All.” Several of the employees spoke at the hearing, saying their customers needed the loans as temporary bridges through difficult times.

“Every day, we change lives,” said Lana Garner, a district manager in Richmond for Allied Cash Advance. “We’re not here to put people in situations. We’re here to help people out of those situations.”

Payday loan customers testified as well, with some saying they were treated fine and others complaining of fees that totaled much more than the original loan amount.

Dana Wiggins, director of outreach and financial advocacy for the Virginia Poverty Law Center, said calls to the group’s hotline for people with loan problems showed regulations were needed.


“I just hope we keep in mind consumers want money, consumers need money,” she said. “But we need to make sure as they access the funds ... they actually have the ability to repay.”