Feds propose payday lending restrictions

LENDING AN EAR: Andy Posner, founder and CEO of the Capital Good Fund, speaks with Chadria Major-Thomas, director of loan origination, at their Providence office. / PBN PHOTO/ MICHAEL SALERNO
LENDING AN EAR: Andy Posner, founder and CEO of the Capital Good Fund, speaks with Chadria Major-Thomas, director of loan origination, at their Providence office. / PBN PHOTO/ MICHAEL SALERNO

The federal government is proposing new controls on payday lending designed to put more onus on lenders to make sure borrowers can repay their debt.

The proposed rule put forward by the Consumer Financial Protection Bureau will cap the short-term, high-interest loans at $500 each, which is already the limit in Rhode Island.

For several consecutive years, Rhode Island lawmakers considered but ultimately backed away from further regulating the industry.

The proposed rule, introduced by a federal agency created under President Barack Obama’s administration, is described as adding protection for consumers who are typically living paycheck to paycheck and have little savings to cover emergencies.

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A report by The Pew Charitable Trusts in 2012 found 12 million adults had borrowed through a storefront or online payday lender in 2010. On average, borrowers take out eight payday loans of $375 each and spend $520 on interest each year, the report found.

The proposed new controls, released for public comment in late July, would apply to short-term loans, of 45 days or less, as well as longer-installment loans that have interest rates that exceed 36 percent.

The proposal also is directed at “title loans,” short-term loans issued with a vehicle title used as collateral.

In addition to the $500-per-loan limit, the proposed rule change would require short-term lenders to make a reasonable determination that the borrower could repay the original loan, by verifying net income, debt obligations and other measures.

But it also provides an alternative to that repayment test that would apply in Rhode Island. Under the alternate option, lenders could approve short-term loans without “an ability to repay” test, as long as the consumer has not already taken out three loans within 30 days of each other and has a cumulative loan debt that can be repaid within 90 days.

The proposed rule is open for public comment through Oct. 7.

Critics who describe the payday-lending industry as predatory say the suggested rules provide too much room for lenders to continue issuing loans that consumers won’t be able to repay without punitive interest.

Andy Posner, founder and CEO of the Capital Good Fund, said the proposed changes represent a slight improvement for consumers but “it’s not transformational.” The Capital Good Fund, a nonprofit, offers an emergency loan of $300 to $500, to be repaid in 12 monthly installments. It carries an interest rate of 35 percent, which amounts to $100 in interest for the maximum loan amount.

Another financial institution, Navigant Credit Union, has a Smart Start Loan that is offered as an alternative to payday loans. It includes a loan amount up to $600, an annual interest rate of 18 percent and a 90-day repayment term, according to its website.

According to Posner, the payday-lending industry makes its money by recycling unpaid debt into new, larger loans. As the borrower cannot repay, he or she pays fees and more interest.

“They know that if you need $300 today, the probability that you’re going to have $320 in two weeks is very low,” Posner said.

The problem with the federal proposal, he continued, is that it offers lenders an alternate to the ability-to-pay test. This is the standard that his nonprofit uses, in evaluating whether to issue loans.

“What’s going to happen is all the payday lenders are going to use the different metric,” he said. “Fundamentally, the problem with payday loans is they only make money if you can’t pay,” Posner said.

Most consumers who use the services are covering their recurring expenses.

The Pew report found 69 percent of borrowers used the loans to cover expenses such as food, credit card bills or mortgage payments.

The industry has a visible presence in Rhode Island.

The largest chain, Advance America, operates 19 locations in the Ocean State. Other large chains include Check ‘n Go, with five locations.

Several managers at payday-lending retail locations declined to speak on the proposed rules. The companies, through a national association, called the proposed rules a “staggering blow to consumers.”

“It will cut off access to credit for millions of Americans who use small-dollar loans to manage a budget shortfall or unexpected expense,” said Dennis Shaul, CEO of the Community Financial Services Association, in a statement.

If enacted, the rule will probably restrict access of consumers to these products, said Posner. But it won’t put payday lenders out of business, which could have been a path.

“There will be a drop-off in access to credit,” he said. “That’s not necessarily a bad thing when the access to credit is perpetuating, rather than solving, a problem.” •

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