Payday lenders skirt state rules protecting vulnerable borrowers, according to a new report issued by congressional Democrats in a response to one of the key talking points from the industry against the newly proposed federal rule on payday loans.
The report, issued Thursday by the Democratic staff of the House Financial Services Committee, examined five state efforts to regulate payday loans that were frustrated by the industry’s reclassification of its businesses or use loopholes.
“What this report tells us is that even in states that have attempted to curb abusive payday lending, harmful practices still exist,” said Rep. Maxine Waters of California, the top Democrat on the committee. “That’s why we need a strong and effective national standard.”
After the Consumer Financial Protection Bureau proposed federal rules on short-term small-dollar loans earlier this month, the industry criticized the agency on the grounds that it didn’t consider successful state models of regulation. House Republicans have backed legislation that would delay the rule’s imposition in favor of states creating their own regulatory regimes.
But the Democratic report pushes back against that line of criticism with instances in which state-level regulations failed to stop consumers from falling into a “trap” of relying on high-cost short-term loans, the outcome the bureau’s rule is meant to stop.
Ohio, for instance, passed a law in 2008 capping loans at an annual percentage rate of 28 percent, far below typical payday loans that can translate to rates over 300 percent. The rule, however, carved out exceptions for mortgage lenders. In response, payday lenders reclassified themselves as mortgage lenders, the report found.
In Texas, interest rates on personal loans are constitutionally capped at 10 percent rates. But payday lenders get around the cap by making borrowers go through an intermediary that charges fees to facilitate the short-term loans.
Similarly, payday lenders get around the requirements Democrats would like to see in Colorado by claiming tribal ownership, in California by operating as online entities, and in Florida by gaming the rules limiting the frequency of loans.
The bureau’s rule would create several regimes for short-term loans, essentially mandating that lenders determine borrowers’ ability to repay or meet certain specifications. The industry has warned that the rules would shutter most lenders if they go into effect as proposed.
