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Published: March 2009

Wolf in sheep’s clothing: payday lending bill harms consumers

In a letter to the House Financial Institutions and Consumer Credit Subcommittee, Consumer Action joined its coalition members in strongly opposing H.R. 1214, which would condone predatory terms in payday loan products.

Below is a summarized excerpt from the letter:

We are writing in opposition to H.R. 1214, the “Payday Loan Reform Act of 2009.”  Although this bill shares the same title as H.R. 2871 in the last Congress, it will have the exact opposite impact on consumers.  Last session’s bill banned loans that involve soliciting cash-strapped consumers to write unfunded checks or to sign over electronic access to bank accounts for quick credit.  H.R. 1214, by contrast, condones that predatory loan model and will stall or stop the significant progress that has been made at the state level to curb usurious lending.

H.R. 1214 provides Congressional consent to single payment loans of 390 percent APR for two weeks or 780 percent APR for one week. The loan cap of fifteen cents per dollar loaned in H.R. 1214 authorizes lenders to charge $60 for a typical $400 loan, which is due in one pay cycle.  This means that, for the typical borrower with nine loans per year, H.R. 1214 authorizes lenders to collect $540 in finance charges for a $400 loan taken out over an 18-week period. 

The bill also purports to limit borrowers to one loan at a time from a single lender and limits borrowers to one extended repayment plan every six months. These provisions will not stop this product from being a debt trap for borrowers because they are easily evaded by the industry. They also fail to address the fundamental problem with the payday lending model-- requiring the borrower to repay the entire principle and interest from a single paycheck in just two weeks--that ensures the typical borrower cannot pay back a loan without needing to take out another. In states that have adopted these and other provisions, regulators report an average of 9 loans per borrower each year, with the typical payday loan user engaging in more than one transaction every month.    

Lenders can easily evade renewal bans by simply putting the borrower in a series of back-to-back transactions where the borrower pays back the initial loan and then takes out a new loan immediately thereafter. In states with renewal bans, about half of subsequent transactions are opened the same day a previous loan is paid off, and almost 90 percent of subsequent transactions are opened during the same pay period. In addition, borrowers would not be precluded from taking a loan from one lender to pay off an existing payday debt at another payday lending store. With a one loan at a time limitation and a renewal ban provision, it is still possible for borrowers to be indebted to a payday lender every day of the year.

Federal legislation to authorize payday lending, instead of prohibiting the predatory small loan terms, is particularly counterproductive when the economy is in recession and families can least afford triple-digit rates.  A growing body of research demonstrates that taking out payday loans is harmful to borrowers.  Using payday loans doubles the risk a borrower will end up in bankruptcy within two years, doubles the risk of being seriously delinquent on credit card payments, and makes it less likely that consumers can pay other bills and get healthcare. Payday loan use also increases the likelihood that consumers’ bank accounts will be closed involuntarily. Given the lower bank account penetration rate for minority consumers, this product undermines progress being made to bring unbanked consumers into mainstream financial services.

We recognize your long-standing interest in protecting consumers and urge you not to proceed with H.R. 1214.

Lead Organization

Consumer Federation of America

Other Organizations

ACORN National | Americans for Fairness in Lending | Consumer Federation of America | Consumers Union | National Association of Consumer Advocates | National Consumer Law Center National Consumers League | National Fair Housing Alliance | Public Citizen | U.S. PIRG | Woodstock Institute State and local organizations: Stephen Stetson, Alabama Arise | Leslie Kyman Cooper, Arizona Consumers Council | Karin Uhlich, Center for Economic Integrity, Arizona | Al Sterman, Democratic Processes, Inc., Arizona Alan Fischer, California Reinvestment Coalition | Jim Gordon, Consumer Federation of California | Lynn Drysdale, Consumer Law Unit, Jacksonville Area Legal Aid, Inc., Florida | Bill Newton, Florida Consumer Action Network | Linda DeLaforgue, Citizen Action/Illinois | Brian Imus, Illinois PIRG | Karen Harris, Community Investment Unit, Sargent Shriver Center on Poverty Law, Illinois | Dan McCurry, Chicago Consumer Coalition (IL) | Victor Elias, Child and Family Policy Center, Coalition Against Abusive Lending, Iowa | Reverend Larry McGuire, Community of Christ, Inter-Religious Council of Linn County, Iowa | Richard Seckel and Anne Marie Regan, Kentucky Equal Justice Center | Charles Shafer, Maryland Consumer Rights Coalition | Paul Schlaver, Consumer Assistance Council (MA) | Paul Schlaver, Massachusetts Consumer Council | Joanne Fox, Massachusetts Consumer Coalition | Janet Domenitz, MASSPIRG | Ron Elwood, Legal Services Advocacy Project, Minnesota | Michael Ferry, Gateway Legal Services, Inc., Missouri | Florence M. Rice, Harlem Consumer Education Council, Inc. (NY) | Josh Zinner, Neighborhood Economic Development Advocacy Project, New York | Julia Fitzgerald, Neighbors Helping Neighbors, New York | Russ Haven, New York Public Interest Research Group (NYPIRG) | Deb Howard, Pratt Area Community Council, New York | Walter F. Brown, Oregon Consumer League | Corky Neale, Memphis Responsible Lending Coalition, Tennessee | Irene Leech, Virginia Citizens Consumer Council | LaTonya Reed, Virginia Interfaith Center for Public Policy | Dana Wiggins, Virginia Partnership to Encourage Responsible Lending | James W. Speer, Virginia Poverty Law Center | Danielle Friedman, Alliance to Prevent Predatory Lending, Washington | Maya Baxter, Statewide Poverty Action Network, Alliance to Prevent Predatory Lending, WA | Jill Miles, Office of West Virginia Attorney General | Peter M. Koneazy, Legal Aid Society of Milwaukee, Inc.

More Information

H.R. 1214

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