States Urged to Curb ‘Payday’ Loan Gouging

Lawmakers and consumer groups took aim at the $2-billion U.S. payday loan industry Tuesday, citing a new survey showing cash-strapped borrowers are being charged interest rates averaging nearly 500%.

California is one of 23 states that has legalized so-called payday lending. California’s law allows an interest rate of up to 459%; consumer groups have found in some cases Californians are being charged interest of more than 650%.

Payday lenders cater to customers needing small cash advances fast. The borrower writes a check, which the lender agrees not to cash until the borrower’s next payday, and receives money immediately.

The transaction includes a fee, which consumer groups say is generally excessive, with a typical $15 to $25 charge for a two-week $100 loan translating into an annual interest rate of 390% to 650%. Nationally, according to the U.S. Public Interest Research Group and the Consumer Federation of America, the annual interest rate on payday loans averages 474%.

“No matter how desperate the consumer, no lender should be able to gouge the public with such high-cost loans,” said CFA consumer protection director Jean Ann Fox.

The groups also worry that the practice could lure unwary borrowers into an escalating cycle of debt.

In some cases, the lender will allow the debt to be rolled over for an additional fee.

Payday lending has grown by leaps and bounds as more and more states have exempted the industry from usury laws capping the interest rates that can be charged on loans. California’s law exempts loan firms from usury laws.

The California Public Interest Research Group and other consumer advocates are urging state legislators to lower the maximum interest rate.

There are an estimated 10,000 payday advance stores in the 31 states that allow the practice, generating revenues expected to top $2 billion this year.

Meanwhile in Washington on Tuesday, the Senate rebuffed an attempt by some Democrats to make it harder for payday lenders to collect debts from people who have filed for bankruptcy.

The Senate voted, 53-44, to reject an amendment proposed by Sen. Paul Wellstone (D-Minn.) that would have prohibited lending businesses from charging more than 100% annual interest in recovering debts from consumers in bankruptcy proceedings.

The amendment was part of pending legislation that would make it harder for Americans to file for personal bankruptcy.