Earlier this month, the Consumer Financial Protection Bureau (CFPB) announced that it will start to collect complaints from borrowers who may have experienced unreasonable fees, unauthorized withdrawals from their checking accounts, or other abuses from payday lenders. While it commends the agency for making that move, an editorial in the New York Times emphasizes the importance, above all else, of ensuring that the loans are affordable. This would require lenders to determine in advance whether a borrower has the ability to repay. Although payday loans -- used by 12 million U.S. borrowers each year -- are advertised as convenient, short-term transactions, they generate the greatest profits from borrowers who are in debt for as long as five months.
Only about 14 percent of borrowers can afford to repay a two-week loan in full, a new study by the Pew Charitable Trusts has found. The rest usually repay part of the loan, which forces them to renew, often multiple times, at a cost of about $50 each time. Lenders also may trigger overdraft fees if they withdraw money from borrowers' bank accounts. Ultimately, many borrowers end up paying as much as 400 percent in interest. Thirty-five states still allow payday lending. Pew recommends that state and federal regulators forbid lump-sum repayment requirements, make sure that payday lenders clearly disclose loan terms, and that lenders be required to spread out payments over months rather than weeks. The editorial board also recommends that regulators limit high-cost upfront fees, which can create an incentive for lenders to push borrowers into new loans.