Under siege by state regulators, payday lenders unveiled voluntary consumer protections last week, including giving some borrowers more time to repay loans and ending ads promoting the product for “frivolous purposes,” such as vacations.
The proposals will “greatly reduce the risk of any customer getting caught in a new cycle of debt,” says Don Gayhardt, president of Dollar Financial, which operates 1,250 outlets in the United States, Canada and the United Kingdom.
Consumer advocates called the effort, which includes a $10 million outreach campaign in media outlets, a hollow gesture designed to ward off government oversight.
“The whole thing is doublespeak. They put a product on the market that is unsafe, and then they put some warnings on it,” says Susan Lupton, senior policy associate at the non-profit Center for Responsible Lending.
Payday lenders offer short-term loans to consumers to be repaid with their next paycheck. Many strapped borrowers, unable to repay, repeatedly roll the loans over, incurring fees of 300 percent to 1,000 percent on an annual basis. The industry has grown into a $40 billion annual business, with more payday outlets than McDonald’s fast-food restaurants.
Capping Problem
The industry says the fees reflect the risk of its product. But state and federal regulators, in response to consumer complaints, are starting to crack down. Congress set a 36 percent annual interest cap on payday loans to the military. Oregon recently passed a rate cap on loans in that state. Credit unions are offering lower-cost alternatives to payday loans, and federal regulators want commercial banks to develop small-loan products.
The repayment plan is the centerpiece of the new consumer guidelines by the Community Financial Services Association of America, which represents about half of payday lenders. Borrowers who fall behind would have an eight-week period to pay off their loans. No new fees would be charged during the period, which could be offered at least once in a 12-month period.
“You just need to come to us a day before your loan is due, say, ‘I don’t have the funds to make my current payment’ and opt into … repayment,” Gaylord says.
Lupton says in the few states where repayment options are offered, they are ineffective. Consumers simply don’t have the funds to pay their balance.
