Consumer bureau calls payday loans a trap, warns of new rules

WASHINGTON Wed Apr 24, 2013 3:09pm EDT

WASHINGTON (Reuters) - The U.S. consumer watchdog said high-cost, short-term loans often trap borrowers in a cycle of debt, warning in a report on Wednesday that new rules could be on the way for payday lenders and banks making similar loans.

The Consumer Financial Protection Bureau said many lenders make small-dollar loans without looking into whether borrowers can afford to pay them back.

The loans carry high fees and must be repaid quickly, which can lead consumers to take out multiple short-term loans, the bureau said.

The 2010 Dodd-Frank law that created the consumer bureau allows it to prevent financial firms from offering unfair products or otherwise taking advantage of consumers.

"The potential consumer harm and the data gathered to date are persuasive that further attention is warranted to protect consumers," the bureau's report said.

"Based upon the facts uncovered through our ongoing work in this area, the CFPB expects to use its authorities to provide such protections."

Consumer advocates have long said storefront lenders and others extend the loans too freely and charge high fees, meaning borrowers wind up taking out new short-term loans to pay off outstanding loans.

The consumer bureau officially opened in 2011 and also oversees mortgages and credit cards. It has been eyeing payday loans and deposit advances, similar short-term loans offered by banks such as Wells Fargo and U.S. Bancorp.

The watchdog began supervising payday lenders in 2012, and Director Richard Cordray said earlier this year that the bureau would work with states on enforcement actions against lenders who operate online to avoid state payday lending rules.

Wednesday's report is the result of a study of the payday loan market. About two-thirds of the payday borrowers in the consumer bureau's study took out seven or more loans in one year, most within 14 days of repaying a previous loan, according to the report.

"Payday and deposit advance loans, while designed for short-term, emergency use, are leading many consumers into long-term, expensive burdens," Cordray said.

"We will be determining how to exercise our authorities to best protect consumers while preserving access to responsible credit."

The study, which looked at more than 15 million loans made over a 12-month period, did not examine why borrowers took out short-term loans or how much consumers understand about the products.

Jamie Fulmer of Advance America, a cash advance company, said the bureau should not make policy changes until it answers these questions.

"Consumers choose regulated payday advances to help manage unexpected and periodic financial difficulties and appreciate the safety net this service provides," Fulmer said in a statement.

The Community Financial Services Association of America said in a statement that the bureau only looked at payday loans and deposit advances, not at other short-term credit options.

The bureau said future research would consider whether limitations on payday lending, which differ by state, are effective and analyze online payday borrowing activity.

(Reporting By Emily Stephenson; Editing by Tim Dobbyn and Chris Reese)

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