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Fred Williams

Payday loan debate burns hot at CFPB hearing

The item on the agenda wasn't what people wanted to talk about, but they spoke up anyway.

The U.S. Consumer Financial Protection Bureau held a public hearing in New Orleans last week about mobile banking. The agency hopes the new technology can extend mainstream bank services to people who don't have a bank now.

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That's nice, but people sitting in the audience had another suggestion: Take the feet of payday lenders off our necks. Speaker after speaker took the microphone and told about a supposedly short-term loan that became a long-lasting burden.

Stacy Sauce, an activist with Together Louisiana, a church and community group, said she was moved to action against payday loans by the experience of one of her family members. The man, a shipyard worker, had ups and downs in his income. When he tried to bridge one of the lean times with a $350 payday loan, the price was high.  Over a period of months he paid more than $600 "and not a penny of that went to pay down the balance," Sauce said.

Marie Brown said her sister was in a similar debt trap. When Brown tried to pull her out, the lender wouldn't let her. "I went to pay it off, but I had to go through so much ... I was not successful."

This was not the first time that payday loans dominated a CFPB hearing. In Dallas last December, the agency wanted to discuss arbitration clauses in consumer contracts. It also got an earful about small-dollar lenders. One critic told the story of a man whose truck -- containing most of his belongings -- was seized by an auto title lender while he was preparing to move to a homeless shelter.

Payday lenders, however, say they are the little guys who are being bullied by the powerful federal government. The industry group Community Financial Services Association and lender Advance America are suing bank regulators for supposedly trying to cut them off from the banking system. The government's "Operation Choke Point" is hitting "lawful, responsible businesses" that are meeting "critical short-term credit needs of millions of American consumers," the association said in its June 6 announcement.

The Justice Department says in a blog post its efforts are aimed at cutting fraudsters off from banking services. Companies whose bills are disputed by high levels of consumers deserve a hard look by their banks.

But some in Washington are taking the lenders' side, saying such scrutiny has a chilling effect on legitimate businesses that just happen to be unpopular.  U.S. Rep. Darrell Issa, chairman of the House Oversight and Government Reform Committee, calls Choke Point an overreach by regulators. For the 28.3 percent of households who have been "shut out of the traditional banking system, short-term online loans are often their only realistic way to make ends meet," he said in letter to Attorney General Eric Holder in January.

And U.S. Rep. Jeb Hensarling, chair of the House Financial Services Committee, bristled at Federal Reserve bank examiners for looking at the "reputational risk" that banks take on when they do business with payday lenders.

What about the consumer protection bureau? It is weighing new rules on payday lenders -- one of the reasons that industry critics show up at its hearings. No one knows what will be contained in the rule, which is expected to be published early next year. A study the bureau published in April 2013 suggests prescriptions for reining in harmful lending, such as limiting the number of times a borrower can go back to the well and renew a loan, racking up fees each time.

But it is the heavy repeat customers who generate 75 percent of the industry's fees, the study found. So while consumers call for a firm federal crackdown on the industry, the fight over what constitutes a debt trap or a useful financial stopgap measure is likely to continue.

4 Comment(s)

A F Bob Blair Jr said:

I was at the meeting in New Orleans on June 12, which was for the subject: "Mobile Financial Services," which mean any financial transaction over a mobile communication devise. I was told audience remarks were limited to the subject. When the podium members begin to rail on payday loans, I decided the audience subject could be off topic. As the first audience member to comment, I stated the currently-used Simple-Interest (SIAPR) method of calculating an Annual Percentage Rate (APR) in the Truth In Lending Act (TILA) of 1968 was not mathematically-true. In 1974, a financial book author agreed with me and stated that he was instrumental in selecting the method of calculation and that the simple-interest method was chosen, because of the cost [method] of calculating. He meant that in 1968 there were no ubiquitous machines to calculate compounding, so the simple-interest was used. I stated that now with high periodic rates and short periods the Compounded APR (CAPR) was much greater than the current Nominal APR. Not spoken at the meeting, due a time limit: A classic example of the disparity between the SIAPR and the CARP on a pay-day loan to borrow $100 for 14 days with an interest of $15 is 391.07% calculated (using Excel symbols) 15%*365/14. The mathematically true CAPR is 3,723.66%, calculated as (((15/100)+1)^(365/14)-1)*100. The APR should be changed to use the Compound Method.


speedy loan search said:

PAYDAY loan companies are not loan sharks. If they are used in the correct way you are only paying $1 per $100 per day. How much cheaper can they make it???? Also the banks arnt lending so its all good everyone attacking payday loans but where are you going to go when you need money.Also no one is tied down and forced with a gun to borrow money. Customers go online and apply themselves even after hearing everything on the news ??? Then they play the victims..if you sign a contract to borrow a loan for 30 days it should be paid within 30 days...if you keep it for a year its going to cost as nothings free!


Paul said:

Payday loans can be a real death spiral financially. I've known folks that stack one on top of the other, creating a whirlwind of financial destruction.


A F Bob Blair Jr said:

Speedy Loan Search, Blogger person (commenter on the above article) Humm, a dollar a day on $100. I would love to loan you that dollar because the mathematically-true (Compound) Annual Percentage Rate (CAPR) on that loan is 3,678.34% calculated (using Excel mathematically symbols) as (((1/100)+1)^(365/1)-1)*100.


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