Herald-Whig View

New rules to curb predatory lending

Posted: Oct. 11, 2017 9:05 am

NEW rules on payday and car title loans have drawn predictable cries of outrage from lenders who say the restrictions will put them out of business.

However, the outrage here should be over the way these lenders have profited from the financial troubles of the customers they profess to help.

The Consumer Financial Protection Bureau's research shows payday lenders too often rely on consumers who cannot afford the loans they take out. With no way to repay their original loans other than to obtain new ones, most of those customers wind up paying more in fees than they originally borrowed.

Moreover, the bureau found that 90 percent of the fees payday lenders collect in a year come from customers who borrowed seven times or more, and 75 percent come from those with 10 or more loans.

These people are not being helped out of a bind; they're being put in a debt trap, the definition of predatory lending.

The bureau's new rules precisely target this problem.

The paycheck loan industry made $6.7 billion in loans to 2.5 million U.S. households in 2015, the bureau estimated. Missouri has some of the loosest regulations for lenders nationwide, and the Associated Press reported earlier this year that 650 payday lenders were operating in the state.

Defenders of these costly loans say they're the only option available to people living paycheck to paycheck. The problem is that the typical borrower cannot handle the terms of a loan, which require the entire amount to be repaid in about two weeks, plus fees.

What these borrowers really need is a conventional installment loan that they can pay back over time. This option is emerging in states that either ban payday loans or encourage small-dollar loans to borrowers with uncertain credit.

Starting in 21 months, the rules will require both payday and auto title lenders -- who offer short-term loans that use the borrower's car or truck as collateral -- to do the sort of thing banks and credit unions already do. Before extending a loan, they'll have to determine whether the borrower can repay it.

These lenders haven't bothered with that sort of underwriting because it's costly. Instead, they charge high fees -- typically $15 per $100 borrowed -- or the equivalent of an interest rate of at least 300 percent a year.

The new rules will allow payday lenders, but not those issuing auto title loans, to skip the ability-to-repay determination if, and only if, they limit the loan to $500 or the maximum allowed under state law, whichever is lower.

Borrowers will be limited to no more than two additional loans of diminishing size over the subsequent 90 days. If they haven't paid off their debt within 90 days, they'll have to wait at least a month before obtaining a new loan.

Payday and auto-title lending companies already are looking for allies in Congress in an effort to reject the new rules. Lawmakers shouldn't be fooled by the industry's arguments.

The issue here isn't access to credit, but protection from predatory lending.