ARUN RATH, HOST:
Years ago, a little-known law professor named Elizabeth Warren observed, you can't buy a toaster that has a one-in-five chance of burning down your house. But financial products, like mortgages and credit cards, weren't subject to the same kind of regulation as toasters. That was the idea behind a new financial watchdog agency that Warren, now a senator from Massachusetts, proposed. And this past week, the agency took a step toward regulating a high-cost form of credit that's burned many consumers - payday loans. NPR's Scott Horsley reports.
SCOTT HORSLEY, BYLINE: President Obama pushed hard for creation of the watchdog agency as part of the financial overhaul five years ago. And this past week, he celebrated its efforts to crack down on what the president calls abusive lending practices.
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PRESIDENT BARACK OBAMA: One of the main ways to make sure paychecks go farther is to make sure working families don't get ripped off.
HORSLEY: Obama was speaking in Alabama, where he says payday lenders outnumber McDonald's four-to-one. The storefronts offer short-term loans to workers against their next paycheck, but Obama cautions what seems like easy money comes with a triple-digit interest rate.
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OBAMA: You don't need to be a mad genius to know that it's a pretty bad deal if you're borrowing $500 and you have to pay back $1,000 in interest.
HORSLEY: Earlier that day, the watchdog agency known as the Consumer Financial Protection Bureau unveiled a framework for regulating the payday industry and other high-cost forms of credit, such as car title lenders. Richard Cordray is the watchdog agency director.
RICHARD CORDRAY: We believe in access to credit for consumers, but it should be credit that helps them, not credit that harms them. I think that's just pretty much common sense.
HORSLEY: One proposed rule would require lenders to make sure borrowers can repay their loan along with their other monthly bills. That might seem like something lenders would want to do anyway, but consumer advocate Mike Calhoun of the Center for Responsible Lending says not so.
MIKE CALHOUN: Usually, their most profitable customers are the ones with the least ability to repay.
HORSLEY: That's because those borrowers wind up renewing their loans and paying a fee again and again, like Eddie Martinez of Huntington Park, Calif.
EDDIE MARTINEZ: You go in, and you pay, but then at that moment, you realize you still need more money for the next bill, and you end up taking out another loan.
HORSLEY: Eighty percent of payday borrowers renew their loans within 14 days. Even when Martinez didn't go to the payday lender, they came to him.
MARTINEZ: I would get a call from them, and they would say, you know, hi, Eduardo. Are you ready to come get another loan today? They treated me as one of their best customers.
HORSLEY: He was, having paid out nearly half $5,000 in fees over a period of five years. Heavy users like Martinez account for the lion share of the $46 billion industry's revenues. Calhoun says with direct access to a borrower's bank account or car title, lenders can usually collect even from those who are stretched thin.
CALHOUN: You just need there to be money in the account momentarily and for you to be first in line and then you'll be OK as a lender.
HORSLEY: The watchdog agency is considering rules that would require lenders to give three days' notice before withdrawing from a customer's account and limiting the number of withdrawal attempts to avoid huge overdraft fees. The industry says it welcomes a national discussion of the proposed rules. But Dennis Shaul, who heads the Community Financial Services Association, a payday lenders trade group, says it's important that regulations not be too costly or intrusive.
DENNIS SHAUL: One of the things that happens when payday loans are made harder to get - it often drives people to less good alternatives.
HORSLEY: The rule-making process is still in early stages, and the director of the watchdog agency says he's trying to strike a careful balance. The government has already spent years studying the payday industry. It doesn't want that effort to go to waste. Scott Horsley, NPR News, Washington.