A watchdog group targets payday lenders with a ‘2 strikes’ rule to help borrowers

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A "payday loans" sign is displayed at a Check 'n Go in Niles, Ill., in 2021. / AP

When Jessica Vega landed her first job out of college as a case manager for a nonprofit organization, money was tight. But she was excited to move out of her mother’s house and into an apartment of her own.

Before long, the burden of rent, food and student loan payments overwhelmed her. A Dominican immigrant, Vega had been the first in her family to earn a college degree. She wanted to prove that she could make it on her own. So she accepted a friend’s suggestion and took out a $400 payday loan, a type of high-interest loan that comes due when the borrower’s next paycheck lands.

That decision sent Vega spiraling further into debt. When she got her paycheck, she didn’t have the money to repay the loan. Weeks turned into months, and the interest accumulated — a cycle that went on for nearly a year. “I kept borrowing the money to keep up,” Vega says. “It got so bad, I ended up going to another payday lending center to be able to pay the first one.”

That was nearly 15 years ago, but Vega is using her experience to push for a law to regulate payday loans in her home state of Rhode Island.

The federal Consumer Financial Protection Bureau (CFPB) estimates that every year, about 12 million borrowers take out these loans, and most are never subject to credit checks or other reviews to assess their ability to repay. Approximately 80% of the loans are not repaid within the initial two-week period. Like Vega, customers let their loans roll over, often many times. The result is that borrowers end up paying hundreds or thousands of dollars in additional interest and fees.

The Center for Responsible Lending (CRL) estimates that in 30 states where payday loans are allowed, more than $2.2 billion is paid each year by borrowers who earn an average of $25,000 annually. In California alone in 2022, more than 5 million payday loans were issued to some 900,000 borrowers. In some states, the annual percentage rate for these loans can exceed 600%.

“These are loans of desperation and they generate their own need and ongoing desperation,” says Ellen Harnick, an executive vice president and director of state policy at the CRL.

In 2017, the CFPB finalized a rule to stop lenders from repeatedly attempting to take payment from a bank account with insufficient funds, which can lead to additional costly bank fees for borrowers. Under the rule, lenders would be limited to two attempts before needing reauthorization from a borrower. For years, payday lenders stalled the rule in court. They also challenged the very structure of the CFPB in a case that went before the U.S. Supreme Court. In a 7-2 decision in May, the high court cleared the way for the “two strikes and you’re out” rule to take effect in March 2025.

“Payday lenders have the ability to collect, even if borrowers don't have the ability to repay,” according to Alex Horowitz, a project director who leads small-dollar loan research at the Pew Charitable Trusts. “That's because payday lenders take access to a borrower's checking account on payday for the loan. [That] serves as their collateral.”

Borrowers pay more in fees than the original loan amount

Vega can’t recall all of the details of her loan, but she remembers showing identification, her bank information and possibly a pay stub. “It was like, ‘Here's the money. Make sure you come back and pay for it in two weeks. If you don't, there's going to be an extra charge.’”

She says she doesn’t know exactly how much she paid in interest and fees on that original $400. But it cost her some pride: It took nearly a year to repay the loan, forcing her to take on two part-time jobs in addition to her regular work and move back in with her mother.

The payday lending industry emerged in the early 1990s, but really gained steam in the mid-2000s, Horowitz says. Today, the average loan is relatively small — just $375, “but most borrowers end up paying more in fees than they originally got in credit,” he says. They “end up in debt for many months of the year, even though they took a loan that just originally said it would be for a two-week term.”

By law, the CFPB doesn’t have the authority to cap interest rates, but states do. According to the Center for Responsible Lending, 20 states and the District of Columbia have done so — usually imposing a limit of 36% APR. The federal Military Lending Act has long capped the annual interest charged on payday loans for military members and their families at 36%.

Edward D'Alessio, the executive director at INFiN, a trade group that represents the payday loan industry, says such limitations make it hard for lenders to do business. “When you impose a 36% rate cap, it's an elimination of the industry,” he says. “You can't keep the lights on. You can't pay employees. You can't pay the cost of compliance, you can't pay rent, etc. at that amount of revenue and profitability.”

Bank loans might not be an option for some

In North Carolina, where the interest rate is capped at 30%, Attorney General Josh Stein says payday lenders have effectively been “chased out” of the state. But Stein says a proliferation of online lenders that skirt the rules has made keeping them out “a game of Whac-A-Mole.”

“They try all of these different structures and subterfuges and everything they can think of to try to make money off the backs of working people in this state,” Stein says.

Still, D’Alessio says that payday lenders fill an important niche for borrowers who might not have other options. For many, not paying a bill on time will result in a late fee that could match or exceed the cost of a payday loan, he says. He also cautions that getting rid of the payday loan industry would not end “informal loan mechanisms” that “exist in every state and in every community.”

“Our customers are not going in and getting bank loans,” he says. “But that doesn't eliminate their need for credit so that they can avoid worse consequences in their financial lives, whether it be late payment of a bill, which generates a late fee or a shut-off or an eviction, or something along those lines, or … losing their car, which eliminates their ability to get to work.”

It took years for Vega to feel comfortable telling her story. But now, at age 36, she’s a senior policy analyst of education and economic well-being with Rhode Island Kids Count, a Providence-based nonprofit. She’s also become a vocal champion for a proposed law in Rhode Island — similar to measures in neighboring Massachusetts and Connecticut — that would cap payday loan interest rates. Proponents in the state have been pushing for such a law for well over a decade. A bill overwhelmingly passed the Rhode Island House this spring but stalled in the state Senate.

Vega says she decided to go public about her experience because “state legislators really respond to stories” more than wonky discussions about policy.

“I know what our families are going through and I have this platform, I have this job, and I have this opportunity to just say something and speak on behalf of people.”