The Consumer Financial Protection Bureau's complex payday lending proposal is sparking concerns that state legislatures will try to repeal existing usury laws and allow a parade of pro-payday-lending bills to move forward.

The bureau's proposal, released Thursday, includes what consumer advocates are calling "loopholes" that would still allow lenders to charge triple-digit annual percentage rates for some long-term loans. As a result, many see payday lenders as likely to shift their policies from short to longer-term credit, while still charging high rates.

At the same time, however, consumer advocates fear that the payday lending industry will use the CFPB's proposal as cover to rollback protections in states that ban or restrict such loans, arguing the agency has given the business its stamp of approval.

"The payday lenders are using the CFPB's proposal as a Trojan Horse to bring payday loans into states like Pennsylvania by saying the CFPB has approved this kind of product," Kerry Smith, a staff attorney at Community Legal Services of Philadelphia, said during a public hearing on the plan Thursday in Kansas City.

There are 36 states that allow payday lending, with the 14 others, such as Pennsylvania and New York, either banning the product or setting such low interest rate caps that it's difficult for lenders to operate profitably.

Every year, states like Pennsylvania have to fight back against payday lenders that draft bills claiming they are bringing "a responsible product in," Smith said, "when what they're trying to do is legalize high-cost payday loans."

Consumer advocates fear the CFPB plan effectively legitimizes the product, while not doing enough to make it more affordable. They point to a memo circulated Wednesday by Pennsylvania state Sen. John Yudichak, which cited the bureau's proposal as a model for new legislation.

"Under my legislation, we will follow the proposals set forth by the CFPB and implement strong guidelines for the lending industry in Pennsylvania," Yudichak wrote.

The memo outlined a loan with a minimum term of one year, no rollovers or balloon payments and an annual interest rate cap of 36%.

But Mike Roles, a field organizer for the Pennsylvania Public Interest Research Group, said that a 36% interest rate cap would roll back the state's current 24% APR cap.

"By putting in a cap of 36% interest, but no cap on fees, it would be the equivalent of a loan with 300% or 400% APR," Roles said.

Andy Morrison, a campaign coordinator at the New Economy Project, said New York's check-cashing industry is making a push to offer payday loans. The CFPB's proposal "allows for high-cost predatory loans without underwriting, so we're being vigilant about protecting our usury cap," he said.

The CFPB is prohibited by law from setting a rate cap on short-term, small-dollar loans, and some of proposal's complexity appears to be an effort to work around that restriction while still protecting consumers from abusive practices. The proposal is the first the agency has brought under its authority to define unfair, deceptive or abusive acts or practices.

Still, some said the proposal would have far-reaching consequences, including making it difficult for payday or auto title lenders to originate short-term products.

Most payday lenders "will be driven into installment lending," said Andy Arculin, of counsel at the law firm Venable and a former senior counsel in the CFPB's Office of Regulations.

The agency was not trying to kill the product overall, however, he said.

"They've identified several harms, one of which is direct account access … and another is the automatic rollovers for these short-term loans and they want the market to go toward different types of installment loans," Arculin said.

CFPB Director Richard Cordray said Thursday that payday and single-payment auto title loans depend heavily on repeat borrowing by consumers.

"The business model depends primarily on access to a borrower's account or auto title, which provides the lender with the necessary leverage to extract payments even when the borrower cannot afford them," Cordray said during the hearing. "Based on our research and what we hear around the country, we believe the harm done to consumers by these business models needs to be addressed."

Many in the industry expect a payday lender will sue the agency over the plan. There is 90-day comment period for the proposal with a final rule expected next year.

The stocks of several publicly traded payday and installment lenders, including Cash America International, Enova International, First Cash Financial Services and QC Holdings Inc., took a slight hit in trading Thursday.

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