Bill Would Set National Limits on Predatory Lending

Bill Would Set National Limits on Predatory Lending
Measure would cap annual interest at 36 percent

July 21, 2008


A number of states have tried to take on the payday lending industry, proposing interest rate caps that would scale back interest rates of 300 percent and more. But results are mixed, as the industry has been successful in some states in turning back limits on its business.

Now, there could be action at the federal level. Senator Richard Durbin (D-IL) has introduced a 36 percent cap on annual interest, a move that he says will save America's working middle class billions of dollars.

By some estimates, predatory lending strips $4.2 billion per year from cash-strapped families by trapping customers in 400 percent interest loans they can't afford to pay off.

While the mortgage crisis continues to worsen, Durbin says a non-controversial fix would cap consumer loans at 36 percent interest. This stops payday lenders' 400 percent debt cycle, triple-digit refund anticipation loans, and high-cost car title lending, which puts the vehicles of low-income borrowers at risk. At the same time, it protects lenders from unfair competition who play by the rules and make responsible loans that actually benefit customers.

"With the economic downturn weighing heavily on families and threatening their financial security, we have for too long neglected to take this simple step," said Kathleen Keest, senior policy counsel with the Center for Responsible Lending.

"This is a fix we can all agree on whether we are concerned about repairing this broken economy or protecting the opportunity for struggling families to hold on to their middle class status. It will bring quick relief from the legal loan sharks that plague our neighborhoods all across the country," she said.

"The Pentagon saw the problem years ago and asked Congress to pass a 36 percent cap to protect our military families, who were targeted by high cost lenders that undermined readiness and damaged military family finances," said Jean Ann Fox, Director of Financial Services for the Consumer Federation of America. "It's time we gave all our citizens the same respect and end the access of predatory lenders to the wallets and assets of hardworking Americans."

Fifteen states and the District of Columbia have controlled predatory payday lending by enforcing interest rate caps at or around 36 percent. The Durbin bill would extend this level of protection to all states, while allowing individual states such as Ohio, which recently passed a 28 percent cap, the room to pass laws that are even more protective of families.

Loan flipping
The Center for Responsible Lending says states that have accepted other measures from the industry, measures that are purported to reform the practice, still have some of the worst rates of loan flipping.

This is what happens when a family who cannot repay in full their average $300 payday loan at the end of two weeks are forced to take out a new loan and pay a new fee to pay off the old loan.

Critics say these reforms have been unsuccessful in stopping the payday lending debt trap. Nationally, payday borrowers have an average of eight to nine loans per year, paying more in interest than what they originally borrowed.

"Around the country, people of all stripes understand that no one should be allowed to charge more than 36 percent," said Lauren Saunders, managing attorney with the National Consumer Law Center. "That message has not gotten through to lawmakers. Sen. Durbin's bill would change that, and enact a common sense limit to predatory lending."