The Associated Press reports that federal regulators are currently drafting rules to regulate payday lending that may be available early this year. For payday loans, the borrower generally writes a personal check to the lender dated on their next payday, and the lender charges both interest and fees. These loans are often provided to low-income individuals who need cash quickly. The Consumer Financial Protection Bureau (CFPB) reports that this often turns into a “debt trap” for borrowers, with multiple, frequent loans and exorbitant interest rates and fees. According to the article, the annual percentage rate on payday loans often tops 300% as opposed to the APR on credit cards which generally ranges from 12-30%.
The new regulations would aim to create more stringent checks on the ability of borrowers to repay loans, including potentially requiring credit checks and limiting the number of times a borrower could take a loan, as well as incentivizing states or lenders to lower interest rates. The regulators would be acting under the 2010 Dodd-Frank Act, which gave the CFPB authority to regulate payday lending. The Act does not allow them to cap interest rates directly.
Ohio had passed a law capping interest rates for payday loans at 28% in 2008, but an Ohio Supreme Court case last year upheld a loophole in the law, allowing lenders to escape the restrictions by registering under the Mortgage Lending Act instead of the Short Term Loan Act.