A borrower usually writes a check for the amount borrowed plus the fee, postdated to the next payday. If he can't pay the full amount then, he might roll the loan over, paying just the fee --- say, $110 on a $500 loan --- and agreeing to pay the $610 -- the $500 balance plus another $110 fee -- in another two weeks. Consumer advocates and some lawmakers criticize payday loans as predatory, because fees correspond to annual interest rates of 300 percent and up.
But consumers like the ease and convenience, and the industry likens them to taxi fares, which cost a lot per mile but aren't intended for the long haul. Twelve states ban payday loans, and Congress in 2006 passed legislation to restrict payday lending to members of the armed services.
In 2009, the House passed a financial system reform bill that created a new consumer agency that would be able to regulate payday loans and included specific measures like a cap on interest. In the Senate, two members of the Senate Banking Committee, Christopher J. Dodd, a Connecticut Democrat who is the panel's chairman, and Bob Corker, a Tennessee Republican, worked to create a bipartisan bill.
Under a proposal developed by Mr. Dodd and Mr. Corker, the new consumer agency could write rules for nonbank financial companies like payday lenders, but would have to petition a body of regulators for authority to enforce. Consumer advocates were critical of the approach. But shortly after the provision became known, Mr. Dodd announced that he was abandoning the talks with Mr. Corker and would introduce a new Democratic measure.
Source:
nytimes.com
