Payday loans and predatory lending practices were a key focus of a House Financial Services Committee hearing last week.

Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB), offered a semi-annual report and answered committee members’ questions, several of which focused on payday lending.

Rep. Maxine Waters (D-Calif.), the ranking committee member, praised the CFPB’s work on payday lending, saying, “We need rules that will protect lower-income and minority communities from unreasonable loan terms and unaffordable rates.”

“Despite efforts by some states to curb predatory practices, most payday loans are simply used to help pay off another payday loan. We must stop this debt trap,” she continued. “There are more payday loan operations than there are McDonald’s stores.”

Waters noted that while state-level reforms have been enacted, such as those in Ohio and Florida, they have failed to reduce significantly the interest rates charged by payday lenders.

“Loopholes and other gaps remain, still leaving vulnerable borrowers susceptible to exorbitant interest rates and cycles of debt. For example, even after Florida’s [payday lending] reforms, Floridians still take out, on average, nine loans per year … with an annual interest rate of about 312 percent.”

Cordray, in response to Waters’ inquiry about CFPB’s findings on payday lending, stated that “about half of payday loans in the U.S. today are made to borrowers who are trapped in a cycle of 10 or more loans.”

He clarified, “There are plenty of payday borrowers who get in and get out with one or two or three loans, and that is perfectly great and we are not trying to cut off any such lending. But it is the debt trap … living your life off of these massive rates of interest and difficult collection practices … that creates a tremendous amount of consumer harm.”

Due to loan defaults and high costs of customer acquisition, Cordray explained that there are “not super normal profits being made in that area.”

What keeps the industry going and what is “at the heart of the business model for the average payday lender, is rolling the customer into loan after loan after loan, so that eventually you’ve recovered more in fees than [the customer] borrowed in the first place.”

Someone who “takes out a loan, pays back more than they borrowed in the first place and still owes in the end more than they borrowed to begin with” is a “very normal” experience among payday loan customers, Cordray added.

Debt trap or debt cycle is a common term used of this experience. Payday lenders “have objected to this notion,” he explained, “but it is the best description I’ve seen of what actually happens in the marketplace.”

The role of the states vis-à-vis the federal government was raised by Rep. Randy Neugebauer (R-Texas), who was concerned about federal pre-emption of state laws.

Cordray explained that both levels of government have authority in regulating payday lending. Currently, around 37 states allow some form of payday lending and each has different regulations.

Despite these regulations, CFPB research and analysis of “millions of transactions in all of the states” found that the so-called “debt trap” is taking place in “all of the areas where payday lending is authorized in this country,” Cordray said.

Forthcoming CFPB rules on payday lending, which have been under consideration since March 2015, are expected to be released in the spring.

These will not pre-empt state laws, Cordray emphasized. “Whatever we do in this area will co-exist with state law. There will continue to be state regulation of payday lending; there will now be federal regulation, as well.”

Rep. Ruben Hinojosa (D-Texas) asked him to address concerns that the forthcoming rules “would eliminate a crucial source of lending for many low-income people who have no other options.”

“We are attempting to both address significant and actual harms to consumers [resulting from some payday loan practices] and we are also trying to make sure that there are ample avenues for small dollar loans to consumers,” Cordray responded.

“We don’t want to squash innovation in this area. We do want, to the extent we can, squash predatory products that are amassing tremendous consumer harm.”

Editor’s note: A free PDF resource sheet on payday loans and predatory lending practices is available here.

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