Seeking to extend protections afforded to military service members, the Senate could be poised to restrict payday loans for other consumers. The introduced bill, Protecting Consumers from Unreasonable Credit Rates Act, seeks to limit interest rates charged at 36%.
If passed it would amend the Truth in Lending Act (TILA) and provide a national usury limit. Payday loans effectively charge anywhere from 360% to a staggering 1250% interest rate when calculated as annual percentage rates.
TILA has long tried to force creditors to disclose interest rates uniformly as an annualized percentage so that consumers can more easily shop and compare terms. TILA not only requires annualized interest rates disclosed, it also requires disclosure of interest charged on top of interest. This interest rate is known as the Annual Percentage Rate or APR.
Payday loans seem to avoid true disclosure of APR by applying an interest rate over much shorter periods of time, like two weeks, hence the name payday loans.
Payday loans are typically marketed in terms of “fees” rather than interest rates or APR. They characterize the transaction, for example, as $115 to be paid in 2 weeks for $100 today. At first the $15 “fee” does not seem outlandish particularly when many consumer transactions are hit by higher “fees.” Bounced check fees, convenience fees, over-the-limit fees, annual fees, teller fees, baggage fees etc. desensitize consumers to the seemingly innocuous $15 fee charged by payday loans.
What is easily overlooked is the fact that this fee will be charged every period and few consumers are able to repay payday loans when they become due. In the above example, a $15 fee on $100 lent over two weeks equates to a 390% APR. If the consumer took a year to pay it back, he or she would owe $490.
Consumer rights advocates have long assailed payday loans and consumer rights attorneys tell horrible stories of clients ensnared in the web of payday loans. When consumers fail to repay, they are frequently harassed and threatened with nonexistent “bad check” criminal charges or the scary sounding falsehood of “felony fraud.”
Sen. Durbin Leads Charge Against Payday Loans
Introduced by Sen. Dick Durbin (D) of Illinois, the Protecting Consumers from Unreasonable Credit Rates Act already garnered four other co-sponsors: Jeff Merkley (D-Ore.), Richard Blumenthal (D-Conn.), Sheldon Whitehouse (D-R.I.), and Barbara Boxer (D-Calif.).
Curiously absent are other senators noted for their consumer protection advocacy. Consumer rights lioness Elizabeth Warren (D) of Massachusetts and anti-big-bank Bernie Sanders (I) of Vermont are not co-sponsors. Although, Sen. Sanders may not support the bill because the specified limit is too high. In 2009 Sanders introduced the failed Interest Rate Reduction Act which that would have capped all consumer loan interest rates to 15%. Of course many consumer right advocates would prefer this lower limit, but they recognize that Durbin’s bill has a better chance of passing.
“With interest rates of two and three hundred percent of value of the loan, these excessive rates and hidden fees have crippling effects on those who can afford it least,” said Durbin in support of his bill, S.673.
Although payday loans are primarily in the crosshairs, Durbin broadly wrote S.673 to limit the APR charged on other consumer loans to 36% as well. Some industry participants concede that the bill would not impact consumer lending in general because other than payday loans, very few consumer loans approach 36% APR. However, anti-regulatory types have already begun to move against the bill.
If passed, S.673 would punish violators up to one year in prison and up to $50,000 in fines.