Changes to payday loan rules needed

The Color of Money

By Michelle Singletary

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Over the years, I've met too many people who were stuck in a hellish payday loan cycle, rolling one loan into another until the fees and outstanding balance crushed them.

So I agree with the National Consumer Law Center, which recently launched a campaign to get the Treasury Department to prevent banks from snatching money from people's direct-deposited Social Security benefit checks to settle payday loans.

Payday loans are small loans that a borrower promises to repay out of his or her next paycheck or benefit check, typically in two weeks.

Although the fees can seem reasonable at first, say, $15 to borrow $100 when annualized, they often amount to triple- digit interest rates or more. I saw a loan contract for one woman in which her rate was more than 1,800 percent. She kept rolling over the loan, piling on fees until the loans ate up her pay.

Payday lenders must give you the finance charge and the annual interest rate on a yearly basis.

Borrowers are charged new fees each time the same loan is extended or rolled over.

The consumer law center is moving on this issue because the federal government — in an effort to go green and save some — is switching millions of people who receive Social Security and other federal benefits from paper checks to electronic payments. In March, enrollees for Social Security, Supplemental Security Income, veterans, railroad retirement and federal civil servant retirement benefits began receiving their money through electronic transfers. People who now receive checks will be shifted to all-electronic payments beginning March 1, 2013.

Payday loans are mainly the domain of storefront lenders in low-income neighborhoods.

The consumer law center, a nonprofit advocacy group working on behalf of low-income consumers, wants specific rules for any payday loan tied to Social Security. The center lays out recommended regulations in its report, "Runaway Bandwagon: How the Government's Push for Direct Deposit of Social Security Exposes Seniors to Predatory Bank Loans."

The report's title is long but the message is concise. With 41 percent of unmarried Social Security beneficiaries relying on the program for 90 percent or more of their income, it is in the best interest of the federal government to ensure that recipients aren't ensnared in a cycle of debt tied to these monthly payments.

"The number of seniors eligible for the bank payday loans through bank accounts and prepaid debit cards will almost certainly increase within the next several years as the federal government increases the pressure to move all federal beneficiaries to direct deposit," the report says.

The center recommends that the Treasury require financial institutions to evaluate whether a borrower can afford the payday loan if it is backed by his or her Social Security check. The nonprofit says the loans should carry annual rates, including fees, of no more than 36 percent, have a term of at least 90 days or one month per $100 borrowed, and allow payment in installments.

The center says the Treasury should prohibit lenders from requiring borrowers to give electronic access to a bank account to pay the loan. If borrowers do allow lenders entry, they should be permitted to cut off that access at any time.

"With these loans, banks profit from vulnerable and hard-pressed recipients of federal benefits, trapping them in a cycle of mounting debt and high borrowing costs," said Leah Plunkett, attorney with the consumer law center and author of its report. "In effect, these high-cost loans are used to hijack benefits federal law intends to provide for the basic needs of elderly and disabled citizens."

The Community Financial Services Association of America, the industry trade group for payday lenders, says it agrees with efforts by consumer advocacy groups to prevent lenders from using Social Security payments to secure payday loans.

"Citizens receiving government benefits are among the most vulnerable members of society," said Lynn DeVault, board chairman of the association.

The lenders that push payday loans say they are serving people in desperate need of a quick financial fix. To be sure, there are many such consumers. But the government should protect seniors who could get into an inescapable cycle of debt.

Readers can write to Singletary in care of The Washington Post, 1150 15th St. NW, Washington, DC 20071. Her e-mail address is singletarym@washpost.com. Comments and questions are welcome, but because of the volume of mail, personal responses may not be possible.

WASHINGTON POST WRITERS GROUP