Each year, the payday loan industry rakes in billions of dollars issuing loans with interest rates that can exceed 400 percent APR. Even worse, payday lenders have been found to prey disproportionately on communities of color and low-wealth families.
According to the Senators’ press release, more than 20 states (including Illinois) have passed legislation to protect consumers from lenders who break state laws by operating without proper licensing. These lenders often fail to comply with measures, such as limiting the length of time borrowers can be in debt and the amount of debt borrowers can have, that Illinois put in place to end the most abusive payday lending practices. While states have been beefing up these regulations, the industry has taken deliberate steps to avoid them by:
- Increasingly moving their operations online in order to make jurisdiction ambiguous and enforcement difficult.
- Partnering with Native American tribes and arguing that the tribe’s sovereignty provides them immunity from state regulations.
Banks have entered the payday lending game by offering “deposit advance loans,” which narrowly avoid being defined as a payday loan and circumvent state consumer protections.
The provisions in the SAFE Lending Act would eliminate these loopholes and protect consumers from overreach on the part of lenders in several ways:
- Protecting consumers’ bank accounts—the payday industry moving increasingly online means these lenders can often access consumers’ bank accounts electronically, leaving them susceptible to abuse. The SAFE Lending Act would enable consumers to designate who can create remotely created checks and cancel a debit associated with a payday loan.
- Creating a level playing field for all payday lenders—the legislation would make all lenders subject to state small-dollar and payday loan consumer protection. It also gives the Consumer Financial Protection Bureau the authority to shut down payment processing for lenders that violate these laws.
- Banning lead generators— some online websites look and act like payday lenders, but are actually companies that collect information and sell it to payday lenders and other companies. These lead generators are not only deceptive, but also rampant with fraud.
Online payday and short-term loans have long been a problem. While there’s much more that can be done to make payday loans less damaging, the SAFE Lending Act is a promising measure of protection against large-scale abuses that have plagued the industry in the past.
Correction: this article was updated on February 11, 2013 to more accurately describe the structure of bank payday lending operations.