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Following a Supreme Court ruling in May, the federal government is expected to get tougher on regulating payday lenders and other firms that offer high-interest, short-term loans. This type of lending - which often targets low-income borrowers - has long drawn fire from consumer groups on grounds that these small-dollar loans quickly balloon when they're not repaid, accruing exorbitant fees and interest.
The Supreme Court ruling resolved a challenge to the Consumer Financial Protection Bureau's authority to act - meaning that the agency can come off the sidelines and get back in the game of fighting predatory lending.
Here's what you need to know if you owe money to a payday lender.
• What role will the federal government take in regulating payday lending?
The CFPB will now be able to restart its implementation of long-delayed rules to crack down on predatory lending. These regulations had first been blocked during the Trump administration and then remained mired in lawsuits, including those that led to the Supreme Court case.
The CFPB has attracted controversy since it was created in July 2010, when Congress passed the Dodd-Frank overhaul as a safeguard against future financial crises. As the would-be chief regulator of payday loans, the agency became a prime target for Republicans and the financial industry and was hobbled during the Trump administration under its acting director, former GOP congressman Mick Mulvaney. Among his actions, Mulvaney put new cases on hold, instituted a hiring freeze and cut the agency's budget request to zero.
Since the beginning of the Biden administration, the CFPB has tried to restart work tightening controls on payday loans, but it still faces fierce industry pushback. Even though the Supreme Court clarified its status as an independently funded agency, at least 14 lawsuits are still meandering through the courts.
In the absence of major change at the federal level, some states have acted on their own. According to the National Conference of State Legislatures, six states and the District of Columbia now ban payday lending outright, while other states have kept it legal but instituted some protections for borrowers.
• How soon could borrowers see any changes to payday lending?
It will likely take awhile before changes at the federal level kick in, but if the CFPB does succeed, some borrowers could get relief from spiraling fees and interest.
The CFPB's main objective is to restrict payday lenders' access to their customers' bank accounts and prevent them from withdrawing money the customers don't have. When these lenders try to extract funds from empty accounts, they slap on overdraft charges and deepen the cycle of debt for the borrower.
Whether the agency succeeds depends largely on how it resolves the remaining legal challenges. If the CFPB prevails in the courts, the industry could face tighter regulation.
The outcome of the 2024 election will also determine whether the CFPB could once again be neutralized by political appointees.
For now, an array of lenders continue to fight the tougher rules, including ACE Cash Express, Populus Financial Group, Advance America, Advance Financial and Check 'n Go. In total, their lobbies spent roughly $5 million per year from 2021 through 2023, according to the watchdog group Open Secrets. And although they contribute predominantly to Republicans, they still have some Democratic allies. From 2023 to 2024, the top two recipients of contributions were Democrats, Rep. Josh Gottheimer (D-N.J.) and Jared Moskowitz (D-Fla.)
• What relief can payday borrowers get now if they're late on payments?
The first recourse is to check what rules your state has, because many states require lenders to provide installment remedies for late borrowers, said Adam Rust, director of financial services at the Consumer Federation of America.
“The majority of states where payday loans are legal require licensed payday lenders to offer these arrangements,” he said.
Citing regulations imposed by Colorado, Hawaii, Ohio and Virginia, a 2022 study from the Pew Charitable Trusts concluded that such rules allowed lenders to still post a profit while providing credit to borrowers under greater protections.
Paying off debt in smaller installments can help consumers save on fees and reduce the chance of re-borrowing on more expensive terms, cutting borrowing costs by as much as fourfold compared with requiring one lump-sum payment, the Pew report said.
• What other steps are states taking?
In many of the states where payday lending remains legal, lawmakers have passed regulations that govern principal amounts, interest rates, fees, rollover terms and alternative repayment plans.
In Virginia, for example, a borrower has a minimum of four months to pay off the loan, while annual interest is capped at 36 percent and late charges at $20, according to the National Conference of State Legislatures.
Other examples of state-level regulations include limits on rollovers, guidelines on when repayment plans can kick in and credit counseling requirements, Rust said.
States have also imposed restrictions on the maximum loan amount, with many setting an upper limit at or around $500. There are exceptions, however: In California and Montana, the most you can borrow is $300. At the other end of the scale is Oregon, which has a maximum of $50,000, according to the National Conference of State Legislatures.
Other state regulations impose limits on the term of the loan, which vary widely. In Alaska, it's 14 days, while it's up to 60 days in Delaware and 90 days in Wisconsin.