By Tim Devaney - 03/26/14 02:49 PM EDT
Senate Democrats are concerned payday lenders too often use "predatory" practices against people with bad credit.
During a Senate banking subcommittee hearing Wednesday to discuss the dangers of payday loans, Chairman Sherrod Brown (D-Ohio) called for better regulations to protect borrowers from short-term loans with unreasonably high fees and interest rates. Brown said payday loans present a growing risk to consumers that needs to be addressed.
Payday loans, generally of $500 or less, help borrowers meet their most immediate financial needs, from rent payments to medical bills to car emergencies, but critics say they often leave consumers worse off in the long run.
Borrowers are usually required to repay the entire loan just two weeks later when they get their next pay check, along with a hefty fee of 15 percent. For many, that isn't enough time to get their finances together, so they end up rolling the loan over and getting even further into debt.
The Consumer Financial Protection Bureau (CFPB) released a study Tuesday that found 80 percent of borrowers end up renewing their loans. In some cases, they end up paying more in fees and interest than they borrowed, the agency found.
The CFPB is considering new regulations for payday lenders, which Senate Democrats cheered at the hearing.
Brown also said raising the minimum wage and extending emergency unemployment insurance would “put money back into Americans' pockets” and make them less dependent on risky payday loans.
“We must not allow working Americans to remain exposed to predatory products, or predatory lending tactics that harm our families,” Brown said.
But Republicans pointed out that payday loans provide much needed cash to customers who can't get credit elsewhere.
“I think there's broad acknowledgement that we have a huge sector of Americans who are under-banked,” Sen. Pat Toomey (R-Pa.), ranking member of the subcommittee, said at the hearing. “They do not have access to ordinary forms of credit that typically higher-income, wealthy Americans have access too.”
Toomey and other Republicans expressed concerns about cutting off access to payday loans.
“God forbid we let people decide what is the most sensible thing for them to do within the circumstances that they face,” Toomey said. “I've got to say there's a breathtaking, underlying arrogance in the presumption by wealthy people who have never been in these circumstances that they know better than those people who make these foolish decisions and borrow this money from these institutions."
But Senate Democrats and the CFPB have expressed concerns that many people who take out payday loans are too vulnerable to make sound decisions.
“For years, payday loans and other short-term, small-dollar credit products were marketed to consumers and policymakers as a one-time, stopgap tool to get people through temporary emergencies,” Brown said. “Now, we are seeing that these products are being used to cover basic expenses, and that these lenders rely upon repeat borrowing for their profitability."