Regulation of financial services businesses is a big topic in the U.S., from Credit Card reform, to restrictions on the use of TARP funds…. to payday loan regulations.
In February, Representative Luis Gutierrez (IL) sponsored a bill called the "Payday Loan Reform Act of 2009". In a speech introducing the bill, Rep. Gutierrez described the Payday Loan Reform Act as follows:
First, the bill caps payday loan fees and interest rates at a total of 15 cents for every dollar borrowed. This fee and rate cap is lower than the fees allowed in 23 states, and would save consumers roughly $250 million annually through federally mandated lower fee levels. Undoubtedly, many in the payday industry will claim that fee and rate caps this low will drive lenders out of business. However, this fee is high enough to allow lenders to continue making such short-term credit advances, while at the same time providing consumers a credit option that is less expensive than many credit card fees and rates, and substantially less expensive than overdraft protection charges through banks.
The second major concern addressed in this bill relates to the "cycle of debt" that too often traps consumers when they cannot repay their payday loan when first due. As a result, many payday lenders force borrowers to rollover their payday loan or obtain a new loan to pay off the initial loan , while piling on additional fees. The "Payday Loan Reform Act of 2009" prohibits these rollovers (i.e., extensions of the loan term in exchange for an additional fee).
Under the bill, payday lenders would be banned from rolling over loans, and they would be required to give consumers the option of entering into a repayment plan in the event that they could not repay their loan when due. The repayment plan will allow consumers to repay the loan over an extended period of time without any additional fees or other charges whatsoever. The bill's repayment plan requirements are generally far stronger than those found in the few state laws that mandate such plans.
These three key provisions–capping fees, prohibiting rollovers and requiring extended repayment plans–would supersede state law provisions when such state provisions are less consumer-friendly. In all other areas, the bill's requirements would provide a minimum national standard for consumer protections, with states free to enact tougher payday lending restrictions.