In the world of consumer finance, they are chameleons: payday lenders that alter their practices and shift their products ever so slightly to work around state laws aimed at stamping out short-term loans that can come with interest rates exceeding 300 percent.
Such maneuvers by the roughly $46 billion payday loan industry, state regulators say, have frustrated their efforts to protect consumers.
Now, for the first time, a federal regulator is entering the fray, drafting regulations that could sharply reduce the number of unaffordable loans that lenders can make.
The Consumer Financial Protection Bureau, created after the 2008 financial crisis, will soon release the first draft of federal regulations to govern a wide range of short-term loans.
The rules are expected to address expensive credit backed by car titles and some installment loans that stretch longer than the traditional two-week payday loan, according to industry lawyers, consumer groups and government authorities briefed on the discussions. All the sources spoke on the condition of anonymity because the deliberations are private. Certain installment loans, for example, with interest rates that exceed 36 percent, the sources said, will most likely be covered by the rules.
Behind that decision, the people said, is a stark acknowledgment of just how successfully lenders have adapted to keep offering high-cost products despite state laws meant to rein in the loans.
The federal regulations taking shape will most likely set off a new round of lobbying from payday lenders.
For now, with the prospect of federal rules on the horizon, some payday lenders have begun aggressively lobbying a number of states, tapping a former governor as a lobbyist in one battle, to weaken state laws restricting expensive loans or to quash new caps before they gain ground.
The lenders contend that if the federal rules are too burdensome, extending loans would become simply too expensive, choking off a form of credit that, while costly, is the only option for millions of Americans.
“What payday lending reflects is the fact that the majority of Americans live paycheck to paycheck,” said Donald C. Lampe, a partner at the law firm Morrison & Foerster, who advises payday lenders. “Just punishing payday lenders is not going to prevent Americans from needing short-term products.”
It is not only the industry that has much at stake. The rules, a major initiative for the consumer bureau, will test the mettle of an agency that faces an increasingly skeptical Republican Congress, including some officials who have called for it to be dismantled.
An account of how the rules are coalescing, pieced together through interviews with the people briefed on the matter, helps to illustrate the high-wire act facing the Consumer Financial Protection Bureau, led by Richard Cordray, as it works to keep to its original mandate to shield consumers from lending abuses.
With its promise of fast cash to anyone regardless of credit history, the payday lending industry, perhaps more than any other, speaks to a growing desperation among the working poor who have virtually no savings and who cannot get bank loans.
The median income of payday loan borrowers was just over $22,400 a year, according to an analysis of roughly 15 million payday loans by the consumer bureau, leaving many struggling. Nearly 70 percent of borrowers use the loans to cover basic expenses, with only 16 percent tapping the loans for emergencies, the Pew Charitable Trust found.
That precarious financial footing helps explain how a single loan — say, $350 — can spiral, with a snarl of fees that exceed the amount first borrowed.
At the center of the regulations being considered, the people familiar with the matter said, is a requirement that lenders assess whether borrowers can repay loans — interest and principal — at the end of a two-week period by examining their income, other debts and their payment history.
Few people can, the data suggest, leaving borrowers to either roll over their loans, heaping on more fees, or take out new ones altogether. The bureau found that during a 12-month period, borrowers took out a median of 10 loans. Borrowers paid median fees of $458. The median amount borrowed was $350. And more than 80 percent of loans were rolled over or renewed within two weeks.
That churn is central to many lenders’ business, according to data from the bureau. Borrowers who take out 11 or more loans each year account for roughly 75 percent of the fees generated.
“Much of the business model is based on repeat borrowers,” said Michael D. Calhoun, president of the Center for Responsible Lending.
In hashing out the rules, the people said, the bureau has been wrestling with how to guard against that cycle while preserving some form of credit.
The expected underwriting requirements, the people briefed on the discussions said, would become increasingly stringent when borrowers apply for a second loan within a certain time period — most likely more than a month — before repaying their first.
An alternative underwriting requirement under consideration, the people said, would require that lenders provide additional protections, that could include limiting the size and duration of the loan, to ensure that borrowers can repay them without plunging further into debt. The rules being considered, those briefed on the discussions said, would limit the number of times a lender could roll over a borrower’s loan during a 12-month period.
Lenders may also be required to provide a so-called off-ramp, of repaying the debt. Also expected under the rules are limits on the number of times that lenders can gain access to a borrower’s checking account.
Among the most hotly debated parts of the rules, the people briefed on the discussions said, are just what kinds of loans fall under the guidelines. Some lenders, they said, have pushed to keep the definition narrow, arguing that car title loans and installment loans should escape the crackdown.
The decision to include those forms of credit, the people said, could represent a significant defeat for the payday industry, especially because some lenders, responding to shifts in the regulatory landscape, have shifted to offer those loans. Shortly after Arizona effectively banned payday loans, for example, ACE Cash Express began registering its storefronts as car-title lenders.
Still, the fight is hardly over. Payday lenders have renewed their efforts to win exemptions from laws restricting the loans, according to state records.
In Washington state, which prevents borrowers from taking out more than eight loans in a 12-month period, lawmakers backed by payday lenders have introduced two bills. One, for example, would double the number of loans allowed in a year.
The push has incited new concerns among consumer advocates and state regulators that payday lenders will seize on the federal rules to undermine tougher state restrictions like those in New York, which caps rates at 16 percent.
Still, for the millions of people in the 35 states that have no such limits, new federal rules may provide some protections.
They are people like Eboni Maze, 32, who works for a cruise line in Wichita and says that a single loan — money borrowed against her car, a 2012 Kia, so she could pay her rent — still haunts her more than three years later. Her car was repossessed after she could not keep up with the payments on the loan, which had an interest rate of more than 150 percent. To afford the down payment on another car, she took out a payday loan. When she could not pay that one off, she took out another.
“Honestly, I call it a black hole,” she said.