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2017-10-05 19:55:03
Payday Lending Faces Tough New Restrictions by Consumer Agency

A federal agency on Thursday imposed tough new restrictions on so-called payday lending, dealing a potentially crushing blow to an industry that churns out billions of dollars a year in high-interest loans to working-class and poor Americans.

The rules announced by the agency, the Consumer Financial Protection Bureau, are likely to sharply curtail the use of payday loans, which critics say prey on the vulnerable through their huge fees.

Currently, a cash-strapped customer might borrow $400 from a payday lender. The loan would be due two weeks later — plus $60 in interest and fees. That is the equivalent of an annual interest rate of more than 300 percent, far higher than what banks and credit cards charge for loans.

Because most borrowers cannot repay their debts quickly, the loans are often rolled over, entangling those who take them in hard-to-escape spirals of ever-growing debt.

The new guidelines pit the consumer bureau, an independent watchdog created in the aftermath of the financial crisis, against congressional Republicans and President Trump, who has made rolling back business regulations a centerpiece of his agenda.

The bureau has aggressively pursued new regulations and enforcement actions since Mr. Trump took office, even as other federal agencies loosened the reins on the industries they monitor.

The payday-lending industry is vast. There are now more payday loan stores in the United States than there are McDonald’s restaurants. The operators of those stores make around $46 billion a year in loans, collecting $7 billion in fees. Some 12 million people, many of whom lack other access to credit, take out the short-term loans each year, researchers estimate.

Lenders argue that the loans provide financial lifelines to those in desperate need of cash, and that the high fees and interest rates are justified by the failure of so many borrowers fail to repay the loans.

The new federal rules limit how often, and how much, customers can borrow. The restrictions, which have been under development for five years, are fiercely opposed by those in the industry, who say the measures will force many of the nation’s nearly 18,000 payday loan stores out of business.

“These protections bring needed reform to a market where far too often lenders have succeeded by setting up borrowers to fail,” Richard Cordray, the consumer bureau’s director, said during a call with reporters to discuss the rule.

Until now, payday lending has mainly been regulated by states, and 15 already have already made the loans effectively illegal. In more than 30 other states, though, the industry is thriving.

Industry officials said on Thursday that they would file lawsuits to block the rules from taking effect in 2019 as scheduled.

The new restrictions “will create credit deserts for many Americans who do not have access to traditional banking,” said Edward D’Alessio, the executive director of Financial Service Centers of America, an industry trade group. Mr. D’Alessio said his group was “exploring every possible avenue” to abolish the rules.

Mr. Cordray is a holdover from the Obama administration whose aggressive pursuit of rules meant to curb what he views as reckless and predatory financial activity has made him a reviled figure in banking circles and a hero of consumer advocates.

But even with Republicans controlling the White House and Congress, he cannot be removed from his job before his term ends next year, except for cause. (That restriction is the subject of a legal challenge now pending before a federal appeals court in Washington.)

The payday-lending rules do not require congressional approval. Congress could overturn them using the Congressional Review Act, which gives lawmakers 60 legislative days to nullify new regulations, but political analysts think that Republicans will struggle to get the votes needed to strike down the regulations.

The odds of reversal are “very low,” said Isaac Boltansky, the director of policy research at Compass Point Research & Trading.

“There is already C.R.A. fatigue on the Hill,” Mr. Boltansky said, using an acronymn for the act, “and moderate Republicans are hesitant to be painted as anti-consumer.”

Under the new rules, lenders would be allowed to make a single loan of up to $500 with few restrictions, but only to borrowers with no other outstanding payday loans. For larger or more frequent loans, lenders would have to follow a complex set of underwriting rules meant to ensure that customers had the means to repay what they borrowed.

After months of lobbying, the industry won one significant concession: The bureau dropped a proposal it made last year to require strict underwriting on many consumer loans with an annual percentage rate higher than 36 percent. Most of the rules announced on Thursday apply only to loans with a term of 45 days or less.

Still, the restrictions would alter the short-term lending market severely, with the number of such loans made probably falling at least 55 percent, according to the consumer bureau’s projections.

The industry’s forecasts of the rules’ impact are starker. The total sum lent would plunge by nearly 80 percent, according to a simulation run by Richard P. Hackett, a former executive at the consumer bureau who is now an adviser to Clarity Services, a credit bureau that focuses on subprime borrowers.

A dropoff of that magnitude would push many small lending operations out of business, lenders have said. The $37,000 annual profit generated by the average storefront lender would become a $28,000 loss, according to an economic study paid for by an industry trade association.

Mickey Mays, the managing partner of Thrifty Loans in Ruston, La., said his company would have to close most or all of its 18 stores, which employ 35 people, if the rules take effect. Thrifty’s profit margins are already slender, he said, and the new restrictions would reduce the stores’ sales volume below what they could profitably sustain.

“We operate in small towns,” Mr. Mays said. “If the C.F.P.B. takes away these loans, they’ve got to answer the question, what happens after? There’s going to be a lot of people who have no place to turn in an emergency situation.”

Billie Aschmeller, 49, who lives in Springfield, Ill., took out a short-term loan two years ago, using her 2002 Chrysler Concorde as collateral. She said she had then found herself stuck — “like a hamster on one of those wheels” — in a cycle of debt.

Ms. Aschmeller, who is disabled and lives on a small fixed income from Social Security, said she had borrowed $1,000 to buy baby supplies for her pregnant daughter. She repaid $150 a month, she said, but those payments barely made a dent in the loan’s principal. A year later, she still owed $800.

“They loan you the money at these outrageous rates, and then they just bleed you,” Ms. Aschmeller said. She eventually paid off the loan by selling her car.

The consumer bureau and other federal regulators are nudging banks and credit unions to play a role in the market. Many community banks used to offer payday-like loans but stopped doing so in 2013 after the Office of the Comptroller of the Currency, a key banking regulator, issued a bulletin discouraging the products. On Thursday, the office unexpectedly repealed that guidance, citing the new consumer bureau rules.

Keith A. Noreika, the acting comptroller of the currency, said he hoped that banks would “offer responsible products” for their customers’ short-term needs.

The biggest companies in the payday industry are nearly all owned by private equity firms. Mainstream banks and publicly traded companies, scared off by a regulatory crackdown and bad publicity, have left the market in recent years. The largest remaining chain, Advance America, which has 2,100 locations in 28 states, is owned by Grupo Salinas, a Mexican conglomerate.

The new rule “completely disregards the concerns and needs of actual borrowers,” said Jamie Fulmer, an Advance America spokesman. “President Trump and Congress must intercede to protect American consumers.”