Officials warn of payday loan “debt trap”

Consumer advocacy groups in New York and across the country have long warned of the “debt traps” posed by payday loans. Certain practices by short-term lenders, they say, are designed to send borrowers who really need debt relief into a spiral of debt. Now, federal investigators may be preparing to take action against some of the most controversial lender practices.

Lenders often market payday and other short-term loans as quick fixes to fill in during a customer’s financial emergency. Typically, the borrower secures these short-term, high-interest loans against a future paycheck.

In a recent speech, U.S. Consumer Financial Protection Bureau Director Richard Cordray said that some of these loans are actually designed to trap repeat borrowers into late fees and other charges that are automatically withdrawn from the borrowers’ accounts as they fall behind on the payments from the original loan.

Cordray also noted that some of these lenders only do business online and some are headquartered in states where regulations are loose or even overseas, meaning that officials can have a hard time enforcing lending laws against the lenders. However, some of the nation’s biggest banks are involved in these loans as well.

A New York consumer advocacy group filed suit last year against JPMorgan Chase Bank over its financial involvement with short-term lenders. JPMorgan Chase’s chief executive recently said the bank would end its involvement with the companies.

Short-term loans represent an extreme form of the debt trap in which many Long Islanders may find themselves. Many people find themselves falling behind on payments, with wage garnishments and liens making it seem like there is no way out. Rather than borrowing more money from payday lenders, these New Yorkers may find that repayment plans, bankruptcy and other forms of debt relief offer a path toward a better financial future.

Source: Bloomberg News, “Payday loans get consumer bureau scrutiny as ‘debt traps’,” Carter Dougherty, Feb. 28, 2013