Last year, Iowa payday lenders issued more than $ 220 million in short-term loans, charging an average annual interest rate of over 260%.
Critics complain that these sky-high interest rates are proof of the laxity of Iowa’s lending laws and that state lawmakers have consistently derailed efforts to cap rates and help borrowers.
Now, the proposed new federal payday loan rules aim to provide new protections to payday loan recipients.
According to proposals unveiled by the Consumer Financial Protection Bureau on Thursday, lenders should take additional steps before offering payday loans or other small loans.
For example, lenders should ensure that their customers can afford to repay their loans, while having enough money for other basic expenses. The rules also attempt to reduce excessive fees that, according to the federal agency, borrowers may face when lenders repeatedly debit bank accounts, causing overdrafts.
Payday lenders have come under fire for charging borrowers extremely high fees that opponents say can envelop them in a debt swirl – a consequence the federal agency said it was seeking to curb with new rules.
“It’s kind of like getting in a cab just to cross town and get stuck on a trip through the ruinous county,” CFPB director Richard Cordray said in a statement.
While supporters have hailed the rules as a way to curb abusive lending practices, they have also raised concerns.
Nick Bourke, research director at The Pew Charitable Trusts, said the rules would push payday lenders to loans that borrowers could pay off in installments, rather than in full on the next payday.
Still, Bourke said the CFPB proposal “misses the mark.”
“Pew’s research shows borrowers want three things: lower prices, manageable installments, and quick loan approval,” Bourke said in a statement. “The CFPB proposal goes to 0 for 3.”
Meanwhile, a payday lending trade group said the rules would create “financial damage” by forcing lenders to close their doors.
“Thousands of lenders, especially small businesses, will be forced to close their doors, lay off employees and leave communities that already have too few options for financial services,” said Dennis Shaul, CEO of the Community Financial Services Association of America, in a statement.
Tahira Hira, professor at Iowa State University and personal finance expert, said payday loan reform is needed, but in a way that doesn’t limit the ability of consumers who need cash to l ‘to borrow.
“I can’t say that we don’t need the reform, but I’m worried about the effect it will have on access (to money) for these people,” Hira said.
Payday lenders held licenses for 175 locations in Iowa in 2015, according to the state’s Division of Banking. Twenty-one were listed at Des Moines; four in Ankeny; two each in Altoona, West Des Moines and Urbandale; and one in Windsor Heights.
Overall, Iowa payday lenders issued more than 613,000 loans, valued at more than $ 220 million, last year, according to the banking division. On average, borrowers received loans worth $ 341.50, with an average annual percentage rate of 262.8%.
Iowa places certain limits on payday lenders. For example, lenders cannot issue more than $ 500 in loans to one person at a time. They also can’t charge more than $ 15 on the first $ 100 loaned, and then no more than $ 10 for every additional $ 100.
Still, a review of state laws by The Pew Charitable Trusts characterizes it as one of 27 “permissive” states, compared to others that offer more restrictions.
In 2007, Governor Chet Culver signed a law capping the maximum annual interest rates auto title lenders could charge. Before that, many lenders charged triple-digit interest rates on loans that required a vehicle as collateral.
But so far, despite repeated attempts, the Iowa legislature has been unable to pass similar caps or offer new regulations for the payday lending industry.
“We have tried to go in several ways, to no avail,” said Senator Janet Petersen, D-Des Moines. She said lawmakers are not necessarily divided based on parties.
“Some people think this is a product that should be offered to people who do not have financing through a bank or a credit union and just think that this product should be offered,” said she declared. “And then there are those of us who think it’s just not a good product. People use it beyond a simple emergency need.
In the absence of statewide legislation, cities in Iowa began to enact their own local ordinances to limit predatory lending practices. These towns include Des Moines, Ames, Cedar Rapids, Clive, Dubuque, Iowa City, Waterloo, West Des Moines, and Windsor Heights.
Matthew Covington, an organizer for the Iowa Citizens for Community Improvement, which focuses on predatory lending issues, worked with these cities to push through the ordinances. He said they were using local zoning laws to protect existing lenders, but prohibited opening new ones.
“It gives cities the ability to send a symbolic message, but also a very real message of ‘we don’t need (payday lenders) anymore’,” he said.
Covington was in Kansas City, Missouri on Thursday for a public hearing on the proposed rules.
“We have a feeling that there will be loopholes that the industry could exploit and which we will want to close,” he said, although he called the proposal “a step in the right direction”.
The CFPB is accepting public comments on the rules until September 14.
USA Today contributed to this report.
By the Numbers: Payday Loans in Iowa, 2015
- 175: approved lenders, compared to 232 in 2010
- $ 341.50: average amount borrowed, compared to $ 327.84 in 2010
- 262.84%: average annual interest rate, compared to 289.85% in 2010
- 613,461: number of transactions, compared to 885,483 in 2010
- $ 220 million: transaction value, down from $ 307.3 million in 2010
- 12: average number of loans per client
- 19.3%: average number of clients with 20 or more loans
Source: Iowa Banking Division