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Susan Tompor: Will Google’s move banning payday loan ads be the end of such loans?

McClatchy-Tribune Information Services

May 30, 2016


Google grabbed headlines by announcing a ban on payday loan ads starting July 13.

Quick-fix loans charging triple-digit rates seem to be viewed by Google and others now with the same social stigma as other dangerous products banned from advertising, such as cocaine, crystal meth and cigarettes.

So can the payday loan see any kind of redemption? Not likely any time soon.

In June, the Consumer Financial Protection Bureau is expected to roll out new federal rules to address egregious practices involving short-term loans. After regulators hold a three-month comment period, the landscape could change. A few speculate that a new alternative loan could hit the scene.

President Barack Obama’s administration has targeted payday loans, among other issues, on his regulatory agenda.

The Consumer Financial Protection Bureau will hold an a field hearing about small dollar lending on June 2 in Kansas City, Mo. Small-dollar loans can involve annualized interest rates that top 300 percent. Proposed rules covering payday lending, auto-title loans and some installment loans are expected to be released in Kansas City.

Payday loans are one of those things that you know aren’t good for you but turn to anyway in a jam. Many consumers, including millennials, need every paycheck to cover bills in trying economic conditions. And then the boss makes things worse by cutting their hours and the paycheck ends up even smaller.

Or maybe a car repair or vet bill throws a monkey wrench into the budget. More than 19 million American households tap into payday loans for short-term credit, according to the industry.

A payday loan is often used by someone who doesn’t have a credit card anymore or is maxed out and cannot borrow more money on plastic.

To get a payday loan, you often write a postdated check for the amount you want to borrow — say $300 plus a $40 fee. The check is made payable to the lender. Or you might authorize the lender to debit your account at a set date. The time period for the loan can often be 14 days.

When that time is up, the lender needs to get back all the money — the amount you borrowed plus the fee. The finance charges and fees will build if you cannot pay off the loan and fees in full.

Nearly 50 percent of millennials don’t believe they could come up with $2,000 if an unexpected need arose within the next month.

Millennials are heavy users of alternative financial services, such as payday loans and pawnshops, according to a research by the Global Financial Literacy Center at George Washington University with the support of PwC.

In the past five years, 42 percent of millennials used an alternative financial product, according to the "Millennials & Financial Literacy" report.

Payday lenders say the need is there and have been critical of the CFPB’s move to regulate what some call "fringe financial services."

Jamie Fulmer, senior vice president of public affairs for Advance America, called the initial outline that CFPB rolled out in March 2015 a "draconian proposal that will result in the elimination of the industry."

Fulmer maintains that no alternatives to traditional payday lending exist and likely won’t exist because banks make too much on overdraft fees to want to create another type of product. (The CFPB is considering new rules for overdraft fees, as well as payday loans.)

Advance America, which has 149 stores in Michigan, maintains that many consumers have been burned by the hidden fees at banks and prefer nonbank lenders.

Tony Collins, 48, said he doesn’t have a credit card any more so he took out a $200 payday loan in mid-May to cover a utility bill.

"I don’t do credit cards. They’re predatory. They’re a lot worse than this," said Collins, who lives in the Detroit area and works for a steel company.

"After the way the banks did us seven years ago, I don’t trust them any more," he said.

Collins was scheduled to work 72 hours this week, so making money isn’t a problem right now. But his bills are higher — money was needed for a stepchild’s high school graduation and prom, a car repair, higher health insurance costs at work.

Collins paid $29 to borrow $200 and he paid it off in one week. It was the first time he took out a payday loan, he said. Plenty of payday loan stores dot area shopping centers, he said, because many people with far lower incomes have more trouble paying their bills.

Is there a way to stop consumers from falling into a debt trap if they cannot pay off the payday loan with the very next paycheck? Maybe a middle ground where some short-term loan options charge far less than traditional payday lenders?

"Millions of people are looking for small credit to help pay their bills," said Nick Bourke, director of the small-dollar loans project for The Pew Charitable Trusts.

He wants to see the federal consumer watchdog adapt a proposal where the payment on alternative loans cannot be more than 5 percent of a borrower’s gross monthly income. The loan would be paid back over a few months, not the next paycheck.

Bourke said the typical payday loan borrower has a bank account and a paycheck, maybe from a factory or retail job. And the consumer can make $30,000 on average — or about $15 an hour.

Some run into trouble because their income zigzags by 25 percent or more each month because of job schedules.

We’re hearing more buzz that major regional banks could offer alternatives, according to reports in the American Banker. Some say a new lower-cost installment loan could be priced as much as six times lower than some payday loans.

Any new product would hinge on the CFPB proposed rules.

Tom Feltner, director of financial services for the Consumer Federation of America, wants to see the CFPB require short-term lenders to evaluate a borrower’s income — and expenses — when making a payday loan.

Feltner said more rigorous underwriting is needed because some consumers couldn’t repay a payday loan anyway because regular bills already take a large chunk out of their paychecks.

Any added glitch can throw a tight budget offtrack.

Many states have put limits on fees. A payday loan storefront in Michigan can charge $65 for a two-week $500 loan.

Or a customer who borrows $100 from a Michigan storefront will be charged up to $15 for a two-week loan (the payday lender may provide for a shorter or longer period — up to 31 days). The customer writes a check for $115 and receives an immediate $100 in cash. But the annualized percentage rate would approach 390 percent for a two-week loan with a $15 fee. In Michigan, the payday lender may charge an additional database verification fee of 45 cents per transaction.

The fees add up, as many loans are not paid off in two weeks and more loans are taken out. The average borrower can be in debt for five months. Some consumers can pay $700 in fees over time on what starts as a $500 payday loan.

As the discussion on payday lending continues, it’s clear that no easy solutions will just pop up for those with big bills, small paychecks and no savings.