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Proposed payday loan rules: Consumer protection or unnecessary oversight?

The Consumer Financial Protection Bureau announced more proposed rules to control the practices of payday loan companies this week. What is the size and scope of this industry that is seen by predatory by some and a necessary lifeline for others? 

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    Maranda Brooks stands outside a payday loans business that she frequented in the past Jan. 22, in Cleveland. Troubled by consumer complaints and loopholes in state laws, federal regulators are putting together expansive, first-ever rules on payday loans aimed at helping cash-strapped borrowers from falling into a cycle of high-rate debt. Analysts often point to Ohio for its complicated history with payday loans: Ranking fourth in the nation in the share of people who took out payday loans, at 10 percent, Ohio also was third among states in the number of consumer complaints to the CFPB about payday loans, behind Texas and California.
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President Obama took to the airwaves in his weekly radio address to talk about so-called payday lenders, the storefronts, often in low-income areas, that offer short term cash advances, for a price

Millions of Americans take out these loans every year. In Alabama, where I visited this week, there are four times as many payday lending stores as there are McDonald’s, the President said on the air. But while payday loans might seem like easy money, folks often end up trapped in a cycle of debt. If you take out a $500 loan, it’s easy to wind up paying more than $1,000 in interest and fees.

Mr. Obama went on to praise the work of the Consumer Financial Protection Bureau, which unveiled proposed rules on Wednesday designed to reign payday lenders in. The rules will be presented to a panel of small lenders for review.

Consumers needing quick cash have come to rely on these short-term loans. But the debts, which typically carry annual interest rates in the triple digits, can quickly get out of hand, forcing borrowers to take out additional loans and trapping them in a perpetual cycle of debt, as NPR reports 

Today the payday loan industry boasts some 22,000 storefronts spread across 35 states, holding an estimated $27 billion in loans, according to the Center for Responsible Lending, a nonprofit that seeks to curb what it sees as predatory lending.

The new rules would require lenders to verify each would-be borrower's income and financial obligations, including other loans. The rules would also limit the number of times loans can be renewed or rolled over.

According to the Pew Charitable Trust12 million Americans used payday loans in 2010. The report found 69 percent of this group used payday loans to pay for expenses such as utilities, rent, credit card bills, or food. Borrowers took out an average of eight loans simply to cover pay for the expenses,turning each individual loan around in 18 days, according to the report. Consumers who roll over these loans week after week can expect to pay upwards of 300 percent in interest rates, reports the Guardian.  

As for Alabama alone, there is no way to measure how many citizens are on the payday loan hamster wheel because there is no state registry for all of the loans, according to the Montgomery Advertiser. That will change on June 1, when a central database will go online and chart the state's outstanding payday loans, and the state's banking regulators will be charged with enforcing the $500 limit for individuals who requiring payday loans, according to the report. 

Lenders are have started to line up in protest of the new rules, saying it would limit some peoples' access to money who do not posses traditional forms of credit. 

"At a time when consumers are demanding choices for flexible, responsible credit products, we're very concerned that this initial proposal could severely restrict their options, Lisa McGreevy, president of the Online Lenders Alliance, told USA Today.

The agency has referred to these new rules as a blueprint for how it will go about regulating the payday loan industry, but some consumer advocate groups are already saying these regulations do not go far enough. 

"They simply change a few terms in their loans and package them a different way," Mike Calhoun, president of the Center for Responsible Lending, told USA Today. "For payday lenders, their best customer is actually the one who doesn't have the ability to pay off."

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