The $46 billion payday lending industry is about to suffer a big blow. The Consumer Financial Protection Bureau's release of new payday lending regulations is imminent. The new rules could crack down on high-fee short-term installment loans, like the kind doled out by car-title and payday lenders, according to the New York Times.
“What their rulemaking will do is say wherever a loan exists, it has to be fair and transparent,” says Nick Bourke, director of the Pew Charitable Trust's small-dollar loans project. “The CFPB has an historic opportunity here. I’m hopeful that they’ll take advantage of it fully.”
This could be a huge win for consumers, but some of you may be left wondering this — why has it taken so long to get these lenders under control? Some payday lenders charge triple-digit interest rates on loans as small as $400. And when borrowers can’t pay back their loans, they’ve been known to harass them at their job and threaten to have them arrested.
Here are a few reasons payday lenders are so hard to regulate:
1. They have mastered the Internet.
You don’t see as many bricks-and-mortar payday lenders these days, but that doesn’t mean business isn’t booming. Revenue for online payday lenders has more than doubled since 2006, from $1.5 billion to $4 billion. Going online is an easy way for out-of-state lenders to get around tough lending regulations in states like New York. Just a year ago, officials in New York fined a South Dakota-based payday lender for luring customers to their website through late-night TV ads that ran in New York.
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2. Not all states are cracking down on them.
Only 15 states actually cap the interest rates payday lenders charge customers. That means in most states, lenders can still charge rates as high as 300% to 400% with near impunity. Unfortunately, even with the CFPB's new regulations, states would still be free to set interest rate limits on payday loans as they please. Still, Bourke is hopeful that the new regulations will have a positive impact, especially if the CFPB can prevent payday lenders from marketing their products deceptively — that is, claiming that payday loans can be borrowed and repaid within a two-week time frame, when in fact 80% of payday borrowers wind up rolling their loans over. The CFPB would achieve this by requiring payday lenders to replace the typical two-week term limit with a six-month term loan, a change that states like Colorado have already implemented.
3. Payday lobbyists have deep pockets.
With a $46 billion industry at stake, you can bet payday lenders won’t go down without a fight. Each year payday lending lobbyists spend millions of dollars making sure Congress doesn't pass laws that would hurt their bottom line. Since 1998, the industry has increased their spending 19-fold, from $230,000 a year to $4.5 million.