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Payday Lenders Adept at Evading State Law, Democratic Committee Staff Report Finds

Case Studies in Five States Highlight Need for Strong Federal Consumer Protections

State-level regulation of the payday lending industry is insufficient in protecting consumers, a House Financial Services Committee Democratic staff report revealed, underscoring the need for strong federal consumer protections.

Because of the history of abuse in payday lending, many states have attempted to restrict these kinds of loans in order to protect consumers. However, the report released today, “Skirting the Law: Five Tactics Payday Lenders Use to Evade State Consumer Protection Laws,” shows how payday lenders are able to circumvent state regulations and put consumers at risk. The report highlights lending practices across five states:

  • In Ohio, which has some of the most stringent small-dollar lending laws in the country, payday companies circumvent regulation by registering as mortgage lenders, which are not subject to the same restrictions.
  • In Texas, payday lenders pose as separate but affiliated entities that charge additional fees and interest for referring customers to the lender, allowing them to exceed the state’s 10 percent cap on personal loans.
  • In Florida, the state’s 24-hour cooling off period serves to trap consumers in a cycle of debt as payday lenders push borrowers to take out multiple payday loans during the same pay period.
  • In California, lenders use online lending to broker payday loans to consumer without first obtaining a state business license or complying with state regulations on loan terms.
  • In Colorado, payday companies claim tribal ownership to avoid compliance with state law.

“Far too many Americans are being taken advantage of by payday lenders who charge exorbitant rates and trap them in a never-ending cycle of debt,” said Congresswoman Maxine Waters, Ranking Member of the House Financial Services Committee. “What this report tells us is that even in states that have attempted to curb abusive payday lending, harmful practices still exist. That’s why we need a strong and effective national standard that will protect all Americans.”

Congress gave the Consumer Financial Protection Bureau (CFPB) the authority to study and regulate the payday lending industry to further curb predatory practices. On June 2, the CFPB released a proposed rule designed to rein in predatory payday lending. In light of the CFPB proposal, the staff report also includes several metrics that stakeholders should use to evaluate the strength of the CFPB’s rule, such as whether the definition of “covered persons” is broad enough to capture various businesses and entities; whether a meaningful cooling off period to adequately address frequent rollovers is addressed; and the extent to which funding for enforcement to effectively monitor online activity is increased.

For more information, read the executive summary and the full report.

“Payday lenders have a history of exploiting even the tiniest weaknesses in state law,” said Gynnie Robnett, Campaign Director, Americans For Financial Reform. “The 5 examples in this report are a reminder of the lessons we've learned over the years about the shape shifting nature of this predatory industry. If the CFPB heeds these lessons, and closes the loopholes in its proposed rules, the CFPB can help millions of Americans escape the payday debt trap.”

“Abusive payday and car title loans lack standard underwriting practices that determine a borrower's ability to repay before loans are approved,” said Mike Calhoun, President, Center for Responsible Lending. “One lesson clearly learned over time, as today's report shows, is that lenders will exploit loopholes in weak laws. The CFPB must ensure its final rules are air tight to prevent lenders from exploiting loopholes that will allow their debt trap lending to continue.”

Waters has been a staunch advocate of strong payday lending rules. In 2015, she led an Interfaith Payday Lending Roundtable with religious leaders and lawmakers to discuss the impact predatory payday and small-dollar lending practices are having in communities across America. She also sent a letter to universities and retirement plans to divest their interests in payday lenders.


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