States mull loosening of laws in response to CFPB payday rule

The Consumer Financial Protection Bureau’s payday loan rule was supposed to reduce the number of Americans who get mired in debt they can’t afford. But in an ironic twist, the 4-month-old rule is being used in state legislatures to justify the creation of a new category of loans that would be even costlier for many borrowers.

One such bill in Florida has zipped through three legislative committees in recent weeks. The Indiana House of Representatives voted to pass a similar measure Wednesday.

The CFPB rule, which faces an uncertain future in Washington, is designed to sharply reduce the use of two-week payday loans. But it does not crack down on longer-term installment loans with triple-digit annual percentage rates, and that is where payday lenders now see an opportunity in state capitals.

Last month in Tallahassee, an industry-backed measure was approved by one Florida Senate committee by a 9-2 margin. In another committee, the vote was 7-1. A House subcommittee approved a related bill by a 15-0 margin. The two measures have yet to get votes in the full House and Senate.

The Florida Senate legislation would authorize 60- to 90-day loans of up to $1,000, while continuing to allow payday loans. While the two- to three-month loans would carry a lower annual percentage rate than the shorter-term loans, they would be substantially costlier for many borrowers.

A borrower who took out a 60-day, $1,000 loan under the pending legislation would pay fees of around $215, according to an analysis by Senate staffers in Florida. Under current law in the Sunshine State, a borrower who takes out two 30-day, $500 loans owes $110 in fees.

“To us, that looks like you’re basically going backwards,” said Jared Ross, a senior vice president at the League of Southeastern Credit Unions & Affiliates, which opposes the legislation. “We view these types of loans as predatory.”

But the legislation’s supporters argued during two recent hearings that the bill would be good for consumers. For example, they noted that the Senate bill allows borrowers to skip a payment if they cannot come up with the cash. One speaker pointed out that customers who pay off the 60- to 90-day loans within two weeks will owe less in fees than payday borrowers.

Looming over the Florida proceedings was the CFPB rule released by then-Director Richard Cordray, one of his last major actions in the job. Read more at America Banker.