Payday lenders fight back

It’s difficult to find much sympathy for one of the industries targeted by the proposed financial reform now making its way through Congress. New rules could set limits on the interest charged by payday lenders and how often they can gouge -- oops, serve -- individual customers.

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Things are looking so bleak that one industry group has asked customers to contact members of Congress on payday lenders' behalf. Apparently we’re supposed to see this industry as not one that preys on the under-banked poor, but rather provides an invaluable service to people with no or bad credit.

We can imagine what those letters might say: “Yeah, I paid interest at an annual rate of 400% -- and was stuck in a nearly hopeless spiral of debt because I couldn’t afford to pay the original loan back -- but it’s the only place I could get money. I’m so grateful for that.”

Some of these outlets provided customers with a script -- resulting in hundreds of identical calls to California’s two U.S. senators, according to the Los Angeles Times. One handout to a customer said, "Tell them you're angry about healthcare and now Congress wants to control your right to get credit.” (That is laughable.)

"They're trying to make this into some kind of little-guys-versus-the-big-guys issue. It's not," said a payday loan customer who told LA Times columnist David Lazarus that she declined to participate, even though she was afraid the payday lender would retaliate by calling in her loan. "It's the payday lenders trying to keep their bread buttered."

In addition to allowing the proposed consumer financial protection agency to regulate payday loan practices, Congress will consider several other proposals. Among them:

• Capping interest at 36%.
• Limiting a payday lender to no more than six loans to a customer per year. About 60% of loans reportedly are made to people who take out at least a dozen a year. "The vast majority of borrowers are unable to repay the loan so are forced to renew the loan," Michael Calhoun, president of the Center for Responsible Lending, has said. "These repeat borrowers … end up paying back far more in interest than they originally borrowed."
• Allow customers more time to repay a loan, so peope are digging themselves in deeper every two weeks.

Meanwhile, efforts to regulate payday lenders continue in some states.

• In Wisconsin, legislators have passed restrictions on payday loans that don’t include a cap on interest rates. “It is an industry known as predatory for its lending practices, but it appears lawmakers have fallen prey to its lobbying efforts,” the Green Bay Press-Gazette opined. Wisconsin was the last state to allow payday lenders to flourish without any regulation.
• The legislature in Colorado approved a bill to extend such loans to up to six months, rather than from paycheck to paycheck. Also, payday lenders would be permitted to charge a $75 loan origination fee, plus monthly fees of $7.50 on each $100 (not exceeding $30) and up to a 45% annual interest rate.

According to The Associated Press, that would be an improvement:

Under those terms, a borrower would pay $337.50 to borrow $500 if they waited until the end of six months to pay.

According to the attorney general's office, the average payday borrower in Colorado refinances the same loan five times before paying off the original amount. In 2009, the average borrower paid $475.73 in total finance charges to borrow $366.97.

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What about those who say payday lenders are needed by people who are underserved by banks and other conventional lenders? That includes a quarter of all U.S. households, a Federal Deposit Insurance Corp. study said.

Does that give lenders the right to gouge customers with high fees and triple-digit interest rates? We think not. (For those who are tempted by a payday loan, Liz Pulliam Weston suggests some alternatives to that perilous path, as does Steve Bucci of Bankrate.com.)

Have you ever borrowed from a payday lender or known someone who has? Was it a handy source of cash or did you/they end up paying lots of fees and exorbitant interest because you couldn't pay the loan and associated costs back right away?

More from MSN Money:

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• The return of the personal loan