Payday loans continue to tempt U.S. consumers, many of whom take the loans, then wind up paying staggeringly high fees that can damage any household budget.
According to Pew Charitable Trusts, 12 million Americans take a payday loan annually, and pay $7 billion in fees alone each year.
"The average payday loan borrower is in debt for five months of the year, spending an average of $520 in fees to repeatedly borrow $375," Pew reports. "The average fee at a storefront loan business is $55 per two weeks."
High fees and the significant debt attached to payday loans has Uncle Sam taking a closer look at the industry. In January, the Consumer Financial Protection Bureau announced it would implement new rules designed to curb industry abuses. Later this spring, likely mid-May, the new rules will be released to the public, but there are some hints on what the CFBP may mandate.
"How the CFPB finalizes its rules will determine whether small-dollar lending will transform into a safe and reliable financial market," says Nick Bourke, director of small business loans at The Pew Charitable Trusts. "The rules will probably prevent some harmful loans from being issued, but to ensure that the millions of loans that are made are affordable and have fair and reasonable terms and conditions, the CFPB will have to set clear, measurable, and enforceable guidelines."
Bourke says the new rules will likely target so-called "covered loans" (short-term loans of 45 days-or-less, in most cases); the "ability to pay" issue that centers on a borrower's reasonable prospects of repaying a loan; and a mandate calling for stronger guidelines on how payday loans are structured, repayment-wise.
Bourke also adds that high cost-loans will continue to be "widely available," with current interest-rate structures remaining firmly in place.
"The CFPB does not have the authority to ban high-cost credit or to regulate interest rates," Bourke states. "Instead, its framework sets conditions lenders must satisfy when making these loans in order to prevent some applicants from getting loans that could be harmful. Although the bureau wisely made borrowers' ability to repay the central theme of its framework, it has not yet established sufficiently clear, objective, and enforceable guidelines describing the quality of loans that people actually receive."
Industry experts generally agree with that sentiment, and there's a sense among those experts the the CFPB should do more to alleviate the problem of high payday loan fees and rates.
"The CFPB has the ability and the opportunity with upcoming rulemaking to make a major positive difference for families in the payday loan marketplace," notes Liz Ryan Murray, policy director at National People's Action, a consumer advocacy group in Los Angeles.
While Congress bars the agency from instituting a rate cap on these loans, there's a lot the CFPB can and should do, Murray says.
"Payday and payday installment lenders rely on trapping people in debt, bleeding them month after month with repeated loans and refinances," Murray says. "The CFPB can short-circuit that by requiring that basic underwriting standards are in place." Additionally, lenders should have to prove that a borrower has the ability to repay every loan - not just that the lender has the ability to collect, she adds. "The CFPB can and should also limit the number of rollover loans or refinances, limit the amount of junk fees and make sure that longer term loans don't front load interest. The potential is there for meaningful reform that will make small dollar lending a safe space, not a predatory space."