AUDIE CORNISH, HOST:
In some parts of Birmingham, Ala., there are so many check cashing stores and payday lenders, it's been called a poor man's Wall Street. President Obama chose Birmingham today to deliver a warning about payday lending. He says the short-term credit in which people borrow against their next pay check might seem like easy money, but it carries a steep price tag with triple-digit interest rates. He called for reforms in the $46 billion payday industry.
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PRESIDENT BARACK OBAMA: If you're making that profit by trapping hard-working Americans into a vicious cycle of debt, you've got to find a new business model. You've got to find a new way of doing business.
CORNISH: President Obama also praised the work of a federal watchdog agency that unveiled a proposal today to regulate payday lenders. NPR's Scott Horsley reports.
SCOTT HORSLEY, BYLINE: Money was tight when Trudy Robideau's car broke down, so she borrowed from a payday lender to help cover the $800 repair bill. When it came time to repay, Robideau was still short of cash, so the lender offered to renew her loan for a fee.
TRUDY ROBIDEAU: Ka-ching - you're hooked. You know, you can feel the hook right in your mouth. And you don't know it at the time, but it gets deeper and deeper.
HORSLEY: Before long, Robideau was shuttling to other payday lenders. Her $800 car repair wound up costing thousands of dollars in loan fees.
ROBIDEAU: I was having to get one to pay another. It's a real nightmare.
HORSLEY: We first told you about Robideau back in 2001, when payday lending was a $14 billion industry. Since then, it's mushroomed to three times that size and morphed into other costly forms such as car title loans. Richard Cordray who heads the Consumer Financial Protection Bureau tells NPR people living on the financial edge need responsible credit.
RICHARD CORDRAY: What we want is for that credit to be able to help consumers, not harm them. What we find is that consumers who get trapped in a debt cycle where they're having to pay again and again, fee after fee, is actually quite detrimental to consumers, and that's what we're concerned about.
HORSLEY: Cordray says one rule the agency's proposed would require lenders to make sure borrowers can repay their loans on time with enough left over for other monthly expenses. You might think lenders would want to do that anyway, but not necessarily. Consumer advocate Mike Calhoun of the Center for Responsible Lending says because they have direct access to a borrower's bank account or car title, high-cost lenders are first in line to collect their money, even if a borrower's other bills go unpaid.
MILE CALHOUN: If you're behind on existing bills, for any legitimate lender that's a red flag. For the payday lenders, that's often a mark of a vulnerable and profitable customer because they will be stuck.
HORSLEY: Dennis Shaul heads a payday industry trade group. He says lenders might be willing to live with an ability-to-pay test so long as it's not too costly or intrusive.
DENNIS SHAUL: It only makes sense to lend if you're getting your money back, and therefore, the welfare of the customer is important. Now, so is repeat business.
HORSLEY: In fact, repeat borrowers are the heart of the payday business. Government researchers found 4 out of 5 payday borrowers had to renew their loan, typically before their next paycheck. One in 5 renewed at least seven times, until the fees added up to more than they originally borrowed. The proposed rules are still at an early stage and they're likely to face challenges. Lenders insist they're filling a need for millions of people who can't make ends meet. Consumer advocates warn costly credit just makes that problem worse. Scott Horsley, NPR News, Washington.
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