Paid day Loans

HARI SREENIVASAN: The federal Consumer Financial Protection Bureau this week took new steps to protect the working poor from people critics describe as predatory lenders, those who make payday loans.

For more about this, we are joined now from Washington by Chico Harlan of The Washington Post.

So, first, I guess let’s just set the stage here. What qualifies in this category of loans that the CFPB is trying to regulate?

CHICO HARLAN, The Washington Post: Well, they’re actually going after a pretty broad swathe of both short-term and medium-term loans, generally characterized by very high interest rates and by the target audience or the target consumer, which is — which tends to be — tends to be the working poor.

You have two categories, payday loans, which are — you know, you have two weeks, basically, to pay it back, and then installment loans, which go over a longer period. You still have astronomical interest rates. And they’re paid back over weeks or sometimes months.

HARI SREENIVASAN: What is the hazard when somebody takes a loan, can’t take it or can’t pay it back? They pick up another loan?

CHICO HARLAN: Yes, that tends to be the biggest hazard.

It’s that, you know, these loans are marketed as a two-week fix. Let’s say you have some unforeseen emergency, a car accident, bills that are larger than anticipated. Well, you go to a payday lending store, and you take out a loan, with the idea that it will be paid back in two weeks.

However, these are people who don’t always have so much money on hand. And when that two-week period hits, boom, you have all this — these financing fees that are added in.

And many people find themselves in a position where the only way they can pay back that loan and still pay for food and other daily needs is to take out yet another payday loan.

HARI SREENIVASAN: All right, so what is the bureau going to do or want to do to try to prevent this from happening?

CHICO HARLAN: Well, they’re going after this in a couple of different ways.

And it does get complicated, but I think maybe the key, the key thing, the pillar in this whole strategy is a cap that will come after the third loan.

So, let’s say you take out a loan, renew it twice. Now a payday company can no longer get you on a fourth — or on a third renewal.

They basically have to give you an off-ramp, where all the money you owe after three payday loans in a row gets paid back over any period of time that you want.

HARI SREENIVASAN: So when do these proposed rules go into effect?

CHICO HARLAN: Well, there’s still going to be quite a long period of deliberation. I would suspect that some — by some time next year, these rules or some version of them will go into effect.

HARI SREENIVASAN: And what has the initial response been from the lending industry about this?

CHICO HARLAN: Almost everybody I have talked to in the payday industry has made it clear that this was far more strict than expected.

And the outcome, or the outcry, I should say, from people in the payday industry has been pretty — pretty fierce, saying that, this will really jeopardize our business, but more importantly — this is their words — this will jeopardize the ability of low-income people to get credit when they’re oftentimes not serviced properly by banks.

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