Approval of payday loan products as a practical option to meet unexpected expenses ranks high with people who have received them. More than 95 percent of borrowers report finding them useful. However, a survey by Global Strategy Group and the Tarrance Group reveals a disparity in respondents’ opinions about payday loans. While more than nine of ten borrowers consider them a sensible decision, only 58 percent of all respondents share the view. Understanding US short-term lending policy may help the general population understand the facts about the industry.

Protecting Payday Loan Customers

Reviewing Federal Regulations
The Federal Trade Commission (FTC) has the responsibility to enforce laws that protect consumers who use payday loan products. Section 5 of the FTC Act requires lenders to avoid “engaging in deceptive or unfair advertising and billing practices.” These federal laws prevent disallowed activities as well:

• Truth in Lending Act
Payday lenders must disclose the annual rate of financing (APR), interest rate and cost of financing.

• Credit Practices Rule
The rule prohibits payday lenders from directly or indirectly accepting wage assignment clauses in contracts.

• Electronic Fund Transfer Act
Lenders may not condition credit on electronic fund transfer preauthorization.

The FTC requires lenders to avoid using unfair, deceptive or abusive debt collection methods. Also, it regards as illegal any actions that attempt to collect debts that do not exist.

Considering the Role of the Consumer Financial Protection Bureau (CFPB)
Following the financial collapse in 2008, federal legislation created the new regulatory agency under the FTC. Focusing on stopping unfair business practices, CFPB empowers consumers to learn to evaluate financial choices by shopping and comparing terms. Enforcement powers authorize CFPB to act against companies that violate the law and to return funds to consumers when the facts justify such action.

A report by CFPB on aspects of online payday loan practices presents an analysis of Automated Clearing House (ACH) activity. Under scrutiny are lenders who schedule payments on a borrower’s payday. Findings in the report that concern regulators include these:

• Overdrafts occurred at least once in half of all accounts that the report covered for a period of 18 months. Fees for insufficient funds averaged $185 for attempted payments.

• One-third of online payday loan customers who received a bank penalty lost their account.

• While 94 percent of the first requests for payment succeeded, some did so because a borrower’s bank covered the overdraft.

The collateral damage to a borrower’s bank account, including penalties and account closures, may lead the CFPB to create measures that prevent lenders from attempting access more than twice.

Understanding the Regulatory Duty of States
Payday lenders operate under regulations in 33 states that have laws governing consumer protections and terms of transactions. The FTC has oversight authority for ensuring compliance with federal laws, but state regulators monitor and enforce activities.
States provide a regulatory framework that allows lenders to issue payday loans while complying with all federal laws.

Laws in most states set limits on the amount of a loan, maximum fees and interest rates. They require lenders to let a borrower cancel a transaction within a limited period, usually the end of the next day of business. Laws may limit the ability of a borrower to extend or renew an advance. States may regulate collection activities on past due accounts to ensure compliance with consumer protection regulations.

Evaluating Regulation Effectiveness
Statistics show a steady decrease in complaints about payday loans over an eight-month period. Some reports reflect a 14 percent decline, but two periods had a reduction of 20 and 24 percent.

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