Payday loans are a booming business but now lenders are divided on whether anyone who has taken out one of these loans should be accepted for a mortgage.

Last week, a code of conduct was launched to help protect borrowers but huge questions have been raised regarding its effectiveness to reign in the rogues.

Bob Woodmansee, an independent financial consultant, is one broker who had a client with a payday loan declined for a mortgage, though he concedes the borrower also had some missed payments on his credit file.

However, some lenders would argue the two go hand-in-hand given payday loans can indicate a borrower is on the edge of their finances.

“My client said he had taken out the payday loans to build a better credit score. Crucially, or so I thought, all the loans had been repaid within 21 days or less of taking them out,” Woodmansee says.

“What was particularly frustrating was the lender gave an ‘accept’ to two separate decision in principle requests, only to decline the case following a random audit check.

“I never quite got a definitive answer as to whether the case was declined solely due to the payday loans but this was certainly the impression I was given in a phone call.”

The negativity around the sector is because a payday loan by its nature indicates a borrower is on the edge of their finances as they are aimed at the financially-stretched who need a few pounds here or there to tie themselves over for the month.

Typically, a payday loan customer borrows a few hundred pounds and has to pay the money back on their next payday or after a few weeks.

So they are designed to fill short-term money holes, hence the fact borrowers who have one are viewed with suspicion by lenders.

“Although many lenders will not specifically exclude those that have used pay day loans I think that it is fair to say it’s unlikely to improve the shape of a borrower’s application especially if the use is habitual,” says London & Country’s associate director David Hollingworth.

“If barely a month goes by without the applicant turning to payday loans it suggests they are having to bridge a gap between income and outgoings.”

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The New Loan Sharks

Watch out — payday lenders are now targeting seniors. And some are even garnishing Social Security benefits.

Mary Love wants you to know: You don’t have to be poor to be a victim of payday loans.

Love, 67, is a divorced LaGrange, Kentucky, resident and a minister in the Presbyterian Church (USA). When she got her first payday loan, in 2003, she wasn’t destitute; she was working for UPS Logistics in Louisville. But she’d fallen behind on her rent.

Her first loan was for $200. She doesn’t recall the name of the place that sold her the short-term cash advance. “They were everywhere,” she says of the storefront operation. Love wrote a check for $230, including the $30 fee for the cost of the loan. The lender handed her $200 in cash. Two weeks later, Love came back to retrieve the check and repay the loan in cash.

Now, though, she was out of money again. So she wrote the store another check, but for twice as much — $460, including a $60 finance charge for the second loan — because she needed to pay of other bills. This cycle of repeat borrowing spun on for months. By the end of the year, Love says, she’d spent $1,450 in fees. Two years later, with the debt still churning and no end in sight, Love was living rent-free in her sister’s basement and relying on temp work to pay of the loans.

With more than 20,000 locations in 33 states, storefront payday lenders, like the one Love used, are familiar sights. But people seeking quick cash now have other options: Nationwide, borrowers can go online to find Internet payday lenders; in all but 13 states, traditional banks, including Wells Fargo and U.S. Bank, offer payday-style loans. All three avenues lead to a similar kind of high-cost credit: short- term loans with sky-high interest rates that typically must be fully paid of in two weeks. Storefront operations require borrowers to submit a postdated check, which is deposited two weeks after the loan is made (in theory, a borrower’s next payday). Internet and bank lenders demand even more: Borrowers must give checking account access to lenders, who can withdraw money as soon as it is deposited. Payday loans are billed as quick cash advances to help borrowers deal with money emergencies between paychecks. Some 19 million Americans use storefront and Internet lenders, spending well over $7 billion a year on fees, says Richard Cordray, the head of the new Consumer Financial Protection Bureau (CFPB), which has supervisory authority over the industry. But it can be a grievously expensive form of credit. According to a 2012 report from The Pew Charitable Trusts, the average borrower takes out eight loans per year at $375 each, paying about $520 in fees alone. That’s bad enough for someone with a regular job, but even worse for retired people on fixed incomes. The Center for Responsible Lending’s 2011 report on payday loans estimates that fully a quarter of bank payday-loan borrowers are on Social Security.

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