Magazine article American Banker

Payday Lenders Try Standard Approach to Respectability

Magazine article American Banker

Payday Lenders Try Standard Approach to Respectability

Article excerpt

WASHINGTON -

The payday loan industry is attempting a makeover.

Today, the industry's national trade group -- the Community Financial Services Association of America -- will announce a major self-regulation effort, including what amounts to a seal of approval for lenders complying with a 10-point best-practices standard.

To earn the decal, for instance, payday lenders would have to give customers a day to cancel their loans at no cost.

Yet several of the standards simply require lenders to follow the law on truthful advertising, caps on fees, and minimum disclosures. And others may indicate why the industry has an image problem. No. 7 reads in part: "A member will not use threats, intimidation, or unlawful harassment to collect accounts."

The payday lending business is only five or six years old but expanding rapidly. Though no definitive data exist, experts said the business has grown 50% a year for the last several years and that revenues are expected to top $2 billion this year. The Community Financial Services Association has 37 members operating more than half of the nation's 10,000 payday advance stores.

A payday loan is a short-term cash advance. A customer writes a check that the lender agrees not to cash until the next payday. The lender gives the customer fast cash and collects a fee of about 20%.

But as the business has grown, so has criticism.

Sen. Joseph I. Lieberman, D-Conn., held a forum on the topic last month.

"A disturbingly high number of payday borrowers apparently soon discover that they can't pay their loan off immediately, and so they end up rolling their loan over for another, and another, and another term," he said. One Kentucky consumer paid $1,000 in fees over six months for a $150 loan, according to the lawmaker.

Sen. Lieberman also criticized "banks from payday-friendly states" that work with payday lenders to circumvent other states' laws barring interest rate gouging. …

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