Of all the questionable financial products targeted to low-income Americans, payday loans are among the most obviously exploitative.
Annualized interest rates on the loans, typically a few hundred dollars repaid days or weeks later, range from about 400 to 800 percent. Usury statutes in a handful of states limit those interest charges, but in most of the country lenders have free reign to charge borrowers whatever they want.
And yet, despite the broad new powers given to the new Consumer Financial Protection Agency under the Dodd-Frank financial reform law to govern products like payday loans, the basic business model for these lenders is unlikely to change. As Timothy Noah writing for Slate points out, Elizabeth Warren’s new agency is explicitly forbidden from establishing an interest rate limit on any extension of credit to consumers.
What’s the deal? Back in the spring, Sen. Bob Corker, R-Tenn., whose supporters reportedly include one of the founders of the payday loan industry, insisted on the interest rate provision as a condition of continuing to play ball with the Democrats crafting the law.
It will be interesting to see whether Warren, who once described payday loans as “a credit product that can impose substantial costs on imperfectly informed and imperfectly rational borrowers” will find another way to use the considerable power of her new agency to crack down on payday lenders.
Curious about the lending laws in your state? Check out this nifty tool from the Consumer Federation of America.