Burgess COMMENTARY

Peter Burgess

Payday Loans’ Debt Spiral to Be Curtailed

Candice Byrd at her home in Bloomington, Ill., on Wednesday. Ms. Byrd took out a $500 payday loan in 2011 that mushroomed into a cycle of loans. Credit Seth Lowe for The New York Times

The payday loan industry, which is vilified for charging exorbitant interest rates on short-term loans that many Americans depend on, could soon be gutted by a set of rules that federal regulators plan to unveil on Thursday.

People who borrow money against their paychecks are generally supposed to pay it back within two weeks, with substantial fees piled on: A customer who borrows $500 would typically owe around $575, at an annual percentage rate of 391 percent. But most borrowers routinely roll the loan over into a new one, becoming less likely to ever emerge from the debt.

Mainstream banks are generally barred from this kind of lending. More than a dozen states have set their own rate caps and other rules that essentially prohibit payday loans, but the market is flourishing in at least 30 states. Some 16,000 lenders run online and storefront operations that thrive on the hefty profits.

Under the guidelines from the Consumer Financial Protection Bureau — the watchdog agency set up in the wake of 2010 banking legislation — lenders will be required in many cases to verify their customers’ income and to confirm that they can afford to repay the money they borrow. The number of times that people could roll over their loans into newer and pricier ones would be curtailed.

The new guidelines do not need congressional or other approval to take effect, which could happen as soon as next year.

The Obama administration has said such curbs are needed to protect consumers from taking on more debt than they can handle. The consumer agency — which many Republicans, including Donald J. Trump, have said they would like to eliminate — indicated last year that it intended to crack down on the payday lending market.

“The very economics of the payday lending business model depend on a substantial percentage of borrowers being unable to repay the loan and borrowing again and again at high interest rates,” said Richard Cordray, the consumer agency’s director. “It is much like getting into a taxi just to ride across town and finding yourself stuck in a ruinously expensive cross-country journey.”

Lenders say the proposed rules would devastate their industry and cut vulnerable borrowers off from a financial lifeline.

“Thousands of lenders, especially small businesses, will be forced to shutter their doors, lay off employees, and leave communities that already have too few options for financial services,” said Dennis Shaul, the chief executive of the Community Financial Services Association of America, a trade group for payday lenders.

According to the group’s website, “More than 19 million American households count a payday loan among their choice of short-term credit products.”

The Consumer Financial Protection Bureau said the median fee on a storefront payday loan was $15 for every $100 borrowed.

Both sides agree that the proposed rules would radically reshape the market. Loan volume could fall at least 55 percent, according to the consumer agency’s estimates, and the $7 billion a year that lenders collect in fees would drop significantly.

CONSUMER WATCHDOG TIMELINE

The Consumer Financial Protection Bureau has provided for $11 billion in relief for over 25 million consumers and has issued about one regulation a month.

• 2010: Overhaul of Finance RulesCongress vastly expands the authority of the federal government over Wall Street, creating a new consumer guardian for mortgages, credit cards, student loans and debt collection.

• 2012: A New WatchdogPresident Obama appoints Richard Cordray, a former attorney general of Ohio, to lead the agency, passing over Elizabeth Warren, who was opposed by congressional Republicans and never won the president's full support.

• 2013: Mortgage RulesUnder rules laid out by the C.F.P.B., banks will be prohibited from making home loans that offer deceptive teaser rates or require no documentation, and must take more steps to ensure that borrowers can repay.

• 2014: For-Profit SchoolsThe agency sues a major owner of for-profit colleges and trade schools, ITT Educational Services, accusing it of predatory lending. The C.F.P.B. later arranges for $480 million in loan forgiveness in connection with the failure of Corinthian Colleges.

• 2015: Payday LoansThe agency proposes rules to rein in short-term payday loans that often have interest rates of 300 percent or more.

• 2016: ArbitrationThe C.F.P.B. proposes a rule to restore customers’ rights to bring class-action lawsuits against financial firms, giving Americans major new protections and delivering a serious blow to Wall Street that could cost the industry billions of dollars.

That will push many small stores out of business, lenders say. The $37,000 annual profit generated by the average storefront lender would instead become a $28,000 loss, according to an economic study paid for by the trade association.

Companies and individuals could go through the courts to try to overturn the rules or they could seek legislative action. The Consumer Financial Protection Bureau is a frequent target of scathing criticism from Republican lawmakers. Mr. Trump, the presumptive Republican presidential nominee, has said that he wants to repeal or dismantle nearly all of the Dodd-Frank act, the law passed in the aftermath of the financial crisis that created the agency.

The Democratic presidential candidates generally support stricter lending rules. Senator Bernie Sanders has called for a 15 percent rate cap on all consumer loans and for post offices to become basic banking centers, a change that could “stop payday lenders from ripping off millions of Americans,” he said in a January speech.

Hillary Clinton praised the payday lending proposals that the consumer agency released last year and urged her fellow Democrats to fight Republican efforts to “defang and defund” the agency.

Consumer advocates are eager for new payday lending rules, but some say the bureau’s rules do not go far enough.

“This misses the mark,” said Nick Bourke, a research director at the Pew Charitable Trusts, which has conducted extensive research on small-dollar lending. “The C.F.P.B. is proposing an underwriting process, which is helpful, but clearer product safety standards are needed.”

In particular, Mr. Bourke said he was frustrated that the agency had dropped a proposal to require that longer-term loan payments consume no more than 5 percent of a borrower’s monthly income. The draft rules instead simply require that lenders make sure that customers can afford to repay the loans and still cover their basic living expenses and other debts.

But others interested in consumer issues said they were happy for any new protections at all in an area of the lending market that has been operating as something of a Wild West.

“We’ve been working toward this day for years,” said George Goehl, an executive director of People’s Action Institute, a group that says it fights for racial and economic justice. “For decades, predatory payday lenders have gotten away with taking money from people who didn’t have much to begin with.”

Candice Byrd, 29, is a former payday borrower who welcomes more restrictions on an industry she views as rapacious and destructive. In 2011, while working a sales job, she took out a $500 loan from a storefront in Bloomington, Ill., to help cover a car payment that was due.

The loan had a six-week duration, but halfway through the period, the lender suggested that she roll it over into a new loan. “She was like, ‘You’re a good customer. This would be helpful for you,’” Ms. Byrd recalled. “It was the worst idea ever.”

The second loan set off a worsening cycle that lasted two years as Ms. Byrd borrowed repeatedly to cover the carrying costs on her mounting debt. Unable to pay her bills, she said, she lost her car and her apartment. To extricate herself, she walked away from her final two loans, leaving her credit report in tatters.

Ms. Byrd now pays cash for anything she needs. She doubts that the rules the consumer agency has planned would have prevented her from going into debt, but they probably would have ended the cycle sooner.

“These places want you to keep borrowing,” she said. “They don’t want you to climb out of the hole.”