Payday lenders start $10 million PR campaign

The payday loan industry has embarked on a $10 million consumer education program and financial literacy effort, officials with the Community Financial Services Association announced Feb. 21.

The CFSA, a trade group for the industry, said it is also making changes to ease the burden for customers who cannot pay off their payday loan at their next pay period. Borrowers will be allowed to pay back loans in four equal payments coinciding with their pay periods, over eight weeks, with no additional fees or costs, in order to help avoid the cycle of rollover debt.

Customers will be allowed to use this extended payment plan “at least once in a 12-month period,” according to the association. Payday lenders must allow customers to use it at least once a year, but individual companies could decide to use it more often, said Don Gayhardt, president of Dollar Financial Group, Inc.

“We want to make sure they use it as a prudent safety valve,” he said. “It’s something our company, and other companies, do routinely now,” he said.

“We have listened to concerns raised about our industry and have developed innovative solutions to address them,” said Darrin Andersen, CFSA’s president.

He said the new initiatives “will ensure that CFSA members hold themselves to a higher standard of responsible service.” The measures will take effect by July 31.

If a payday lender does not comply with these rules, they will be booted out of the association, said Lyndsey Medsker, a spokeswoman for the trade group. To ensure compliance, she said, the association has hired an independent company to audit members.

More than 160 companies operate about 12,000 payday loan stores — about 50 percent to 60 percent of all payday loan outlets, according to Medsker — are members of the association.

Critics of the payday loan industry said the Feb. 21 announcement is a tactic designed to deflect attention from the fact that payday lending is under fire across the country. “There are all kinds of state legislative proposals to curtail payday lending,” said Jean Ann Fox, director of consumer protection for the Consumer Federation of America. “The industry has a crisis on its hands, so it is responding with a public relations campaign.”

The industry’s measures do not change the fact that interest rates for such loans typically are “still at least 400 percent; it’s still due the next payday; the loan is still not given based on the ability to repay; and a check is still written without money in the bank,” Fox said.

After Congress passed a law last year that limits interest rates on all consumer loans to military personnel to 36 percent annual percentage rate, she said, there has been much interest among the states for setting a 36 percent loan rate cap for all consumers.

The federal law, which goes into effect no later than Oct. 1, in effect prohibits extending payday loans to military personnel and their families, because lenders will no longer be able to lend them money using a check, or any other means of access to a financial account, as security for a loan. This affects storefront payday lenders as well as Internet payday lenders, who often gain electronic access to military borrowers’ accounts.

The industry’s public education program includes mass-media advertising to encourage consumers to only use payday advances in a responsible manner, to include a full-page ad in Wednesday’s edition of USA Today. The CFSA is also working with the National Black Caucus of States Institute to educate black legislators and community leaders on critical issues regarding consumer credit, and to provide resources to educate consumers in how to better use credit.

A number of financial literacy programs advise consumers not to use payday lenders.

“I’m not sure what the content of their program will be, but even if they are the gold standard of financial literacy education, it still does not make sense to get a payday loan,” Fox said. “It’s like selling cars without brakes, then funding driver education.”

The payday loan industry’s new program also:

• Ban advertising that promotes the payday loans for “frivolous purposes” such as gambling, nightclubs or vacations.

• Requires member companies to place a “customer notice” on all advertising and marketing materials stating: “Payday advances should be used for short-term financial needs only, not as long-term financial solutions. Customers with credit difficulties should seek credit counseling.”