Group Calls for Tight Payday-Loan Rules

Dangerous Cycle of Repeat Payday Lending Won't Stop Without Firm Cap on Rates, Group Says

December 17, 2007

NEW YORK (Associated Press) - A consumer advocacy group called for tighter state-level restrictions on the payday-loan industry, arguing that a firm cap on interest rates is the only way to keep borrowers from spiraling into a cycle of debt.

Payday lenders offer quick cash advances, for a fee, that customers _ in theory _ repay with their next paycheck. Borrowers who cannot repay the loan often "roll over" the loan repeatedly.

An analysis, released Thursday, of nearly 14 million loans in five states without firm caps on interest rates found that more than 60 percent of payday loans were made to borrowers who made 12 or more transactions annually.

The study by the Durham, N.C.-based Center for Responsible Lending also found that 24 percent of those loans went to borrowers with 21 or more loans per year.

Once borrowers take out a payday loan, they "must take out loan after loan after loan" to keep up with the debt, said one of the report's authors, Uriah King in a conference call with reporters. The payday loan industry's business model is dependent on such transactions, King said.


The report said that without a firm annual interest rate cap of around 36 percent, state-level restrictions offer no solution.

Ineffective regulations, the group said, include cooling-off periods between loans, limits on outstanding loan amounts outstanding and payment plans.

The study calculated that the 12 states and Washington, D.C., with firm caps saved consumers $1.5 billion annually in excess fees.

Lyndsey Medsker, spokeswoman for the Community Financial Services Association of America, the industry's trade group, said in an e-mailed statement that this change would result in a "complete ban of the payday advance product. Banning a popular, regulated, short-term credit product is not a consumer protection."

Virginia, Ohio, South Carolina and Montana are considering tighter payday lending laws. Last year, Congress passed a law limiting the amount of interest members of the military and their dependents can pay on consumer loans to an annual rate of 36 percent.

However, consumer groups have been critical of the Defense Department's interpretation of the law.

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