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Payday loans suck up billions in fees in states where they’re unregulated

An Advance America Cash Advance payday store in Arlington, Va. (Rich Clement/BLOOMBERG)

Payday loans remain largely unrestricted in more than half the states in the country, generating billions in fees, according to a new report.

The easy-to-get small loans have drawn a lot of criticism in recent years for burdening low-income borrowers with astronomically high interest rates and fees. In states with no restrictions on the loans, borrowers who quickly replace one payday loan with another generate $2.6 billion in fees every year.

“Loan churning dramatically increases payday lending fees without providing borrowers with access to new credit,” a report released Tuesday by the nonprofit, nonpartisan Center for Responsible Lending report said. In other words, that’s $2.6 billion that just goes to the payday lending industry.

More than half the states — 29 — still have no substantive restrictions on payday loans, according to the report. Twenty-one states and Washington, D.C. have significant limits or never allowed the practice to begin with. And, of those, 16 have interest-rate caps that eliminate what the CRL calls the “payday lending debt trap.”

“The trend at the state level has been moving the market away” from payday loans, says Diane Standaert, senior legislative counsel with the CRL, although many states have yet to restrict the practice.

Washington state, however, does have a set of regulations on such small loans that went into effect in 2010. The number of payday borrowers in the state dropped by 43 percent between 2009 and 2011, CRL found. The number of payday stores fell from 603 before the law passed to 256 afterward, and borrowers paid $136 million, or 75 percent, less in annual payday loan fees. In 2009, the average payday borrower was in debt for 155 days. By 2011, that number fell by nearly a third to 105. The Washington law limited the size and number of payday loans individuals could take out.

Outside of federal restrictions, one of the best things states can do is put in place a cap  — of 36 percent — on the annual rate charged by payday lenders, the report suggested.

But limiting interest on payday loans isn’t enough, says Signe-Mary McKernan, an economist and senior fellow with the Urban Institute, a nonpartisan think tank. High-risk borrowers still need access to loans, she says, so states should encourage mainstream alternatives. A few years ago, for example, the Federal Deposit Insurance Corp. sought to do just that with its Small-Dollar Loan Pilot Program.

State and local policymakers can also encourage low-income families to save, she says, “so that they’re less reliant on these products to start.” New York City, for example, is testing out the “Save USA” program, in which the city offers low-income families matching funds for keeping part of their tax refunds in a savings account for a period of time.

While states and cities explore ways to crack down, though, more and more lenders are reportedly moving online.

Niraj Chokshi is a general assignment reporter for The Washington Post.

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