WASHINGTON -- Legislation being introduced today in Congress would try to rein in payday lenders that offer short-term loans with annual percentage rates that often average more than 400 percent and, critics say, trap borrowers in cycles of debt.
The payday lending industry is worth $40 billion a year. The short-term loans are advertised as quick ways to get cash - usually a few hundred dollars - to tide borrowersover until their next paychecks.
Fees often are in the range of about $50 for a short-term loan of $200 to $300.
"Right now, payday lenders prey on people needing quick cash," said U.S. Sen. Kay Hagan, D-N.C. "They expect immediate repayment, typically within two weeks."
If borrowers are unable to make their payment, lenders offer the opportunity to take out more loans.
According to Hagan, 60 percent of payday lender customers have taken out at least 12 loans in the past year.
Hagan, a former banker, will introduce legislation today to regulate the industry from Washington.
The bill, called The Payday Lending Limitation Act of 2010, would modify the Truth in Lending Act. Hagan will introduce it as a standalone today, and again next week as an amendment to the financial regulatory reform bill making its way through the Senate.
Some state regulations already exist. The District ofColumbia and 17 states, including North Carolina, have passed caps on annual percentage rates, ranging from 17 percent to 60 percent, for short-term loans.
As state senator, Hagan worked to impose the rate cap in her home state.
Hagan's Senate bill does not institute a lending cap, though, because she doesn't think it would be politically feasible on either side of the aisle.
A bill introduced last year by U.S. Sen. Dick Durbin of Illinois would impose a 36 percent cap, but it remains in committee.
Instead, the legislation would impose regulations aimed at curtailing payday lending.
It would limit borrowers to six payday loans in a 12-month period. That provision reflects a rule by the FDIC imposed on banks that allows them to make short-term, high-cost loans, but not for longer than three months at a time.
The bill also would require lenders to offer borrowers extended repayment plans beyond those six loans, at no extra cost to the borrower.
And the bill would allow the Federal Reserve to license payday lenders. The legislation would be paid for through licensing fees.
"It will protect borrowers by ensuring short-term cash advances actually remain short-term," Hagan said in an interview Wednesday.
Her office worked with the Durham-based Center for Responsible Lending to shape the legislation.
Mike Calhoun, the organization's president, said that his group would prefer to see a rate cap but that Hagan's bill offers a practical method to significantly curb payday lending.
"What this does is, in essence it calls the payday lenders' bluff," Calhoun said. "They say these are once-in-a-blue-moon loans. ... If you're going to allow it ... it should be for only short-term emergency financing. It shouldn't be this debt trap that they put people in where they roll the loan over and over again and have to pay the fee over and over again."
A law passed in 2006 effectively prohibited payday lending among active military and their families. The law was pushed by the U.S. Department of Defense because it saw the debt struggles of its military members as a national security risk.
Calhoun said lawmakers are realizing that nonmilitary borrowers should have the same opportunities.
The lenders' case
Steven Schlein, spokesman for the Consumer Financial Services Association of America, said payday lenders had nothing to do with the recent financial meltdown and shouldn't be part of the congressional financial reform package.
"We object to any regulation by the federal government," he said. "We're already regulated by the states."
He said lenders make thin margins now, totaling $6.5 billion in revenue annually through about 110 million loans.
"Any change to our product will eliminate the product, and then where will consumers get $300 loans?" Schlein asked.
The payday lending industry has been working hard in the past year to help shape the financial reform bill. USA Today reported this week that lobbying by payday lenders has increased significantly in the past year.
The Online Lenders Alliance, an industry group for the online payday lending industry, has hosted dozens of fundraisers for lawmakers at a Capitol Hill townhouse it owns.
Among those lawmakers receiving funding from the online group's political action committee is U.S. Rep. Patrick McHenry, a North Carolina Republican and a member of the House Financial Services Committee, according to the Center for Responsive Politics.
