Why We Need Serious Payday Loan Reform From The Consumer Protection Bureau | Economic intelligence
After two years of study, the Consumer Financial Protection Bureau is getting closer to drafting new rules for payday loans and small loans. At the Country Music Hall of Fame in Nashville, Tennessee, last week, the Bureau Chiefs heard a roundtable of authorities and a packed room of citizens – people with strong opinions and, in many cases, personal stories to tell. A day later, on Capitol Hill, a panel of experts answered senators’ questions on some of the same loan categories and concerns.
Witnesses to both events cited news desktop analysis data from over 12 million in-store payday loans issued over a 12-month period. The report confirms the two main findings of previous research. First, these triple-digit interest rate loans, promoted by lenders as a way to cope with a short-term crisis, routinely drag borrowers into an unmanageable cycle of debt. And second, as Richard Cordray, director of the Office of Consumer Protection, noted, “the business model of the payday loan industry depends on people getting stuck in these long-term loans.” In other words, most of the industry’s income comes from borrowers getting hung up and having to pay fees that very often eclipse the original loan amount.
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The latest data should strengthen the office’s resolve to act. But, as the evidence increasingly shows, the office will need to resist the temptation to focus exclusively on the traditional two to four week loan with a lump sum repayment. To keep pace with a rapidly changing market, rule making must also address payday-like issues of a line of long-term loan products developed by an industry that plays all angles to bend the rules – those planned as existing. those.
Payday loans took root in the early 1990s, after the big banks and their credit card divisions devastated usury laws that were standard across the country. Twenty-five years later, the payday loan is a huge and very profitable industry, but a gravely failed experiment when it comes to its supposed purpose of helping people in a traffic jam.
In the Office of Consumer Protection’s follow-up, four in five payday loans were renewed or renewed within two weeks, and more than one in five initial loans led to a streak of at least seven total loans. Among borrowers with monthly pay (a group that includes Social Security retirement and disability benefit recipients), one in five has taken out a loan every month of the year!
Molly Fleming-Pierre came to Nashville from Kansas City, where she works on economic justice issues for a faith-based partnership of more than 200 Missouri congregations. Fleming-Pierre said the story of a disabled Vietnam veteran who had borrowed to help with his wife’s mortgage payments and medical bills after she broke her ankle. The vet ended up, she said, with “five payday loans he took out over three years,” ultimately costing him $ 30,000 in payments and contributing to the loss of his home.
In Nashville and Washington, witness lists included industry representatives advocating for individual freedom and claiming to speak for their clients as well as themselves. But when the Pew Charitable Trusts conducted a nationwide survey of payday borrowers, the vast majority, according to Pew’s Nick Bourke, supported stricter regulation of payday lenders, with eight in ten in favor of a rule limiting payments. to a small fraction of a paycheck.
One of the reasons for this attitude, Bourke and others have suggested, is that borrowers frequently take out these loans with a vague understanding of the costs. Stephen Reeves of the Cooperative Baptist Fellowship in Decatur, Georgia, has been working on payday loan and small dollar issues for five years. During that time, Reeves said, he’s heard “over and over” from borrowers who say they’ve been making regular payments for months with “no idea … that they weren’t cutting what they owed.”
At the state level, voters and elected officials are becoming aware of these realities. Twenty-two states have passed laws establishing interest rate caps or other restrictions on payday loans. But while some of these efforts have made a positive difference, the results show that states cannot do it alone.
In response to the new regulations, the industry has turned to installment loans, auto title loans and other products that often turn out to have the same key issues: high fees or rates, often camouflaged. and difficult to understand, and automatic repayment mechanisms that allow lenders to extract money from borrowers’ bank accounts, even if it means they are unable to pay rent, utilities and other basic living expenses.
The typical store payday loan has an effective annual interest rate of nearly 400 percent, according to Nathalie Martin of the University of New Mexico School of Law, who testified at the Senate hearing Wednesday. Interest on auto title loans tends to be a bit lower, around 300%, she said. But Martin added that interest rates on installment loans, especially the types that payday lenders have developed to bypass state regulations, can be much higher. “A consumer I know borrowed $ 100 and paid off a thousand dollars in 12 months,” Martin said. “That’s 1100 percent interest.”
Additionally, in some of the states most in need of new laws, lawmakers have struggled to mobilize the will to act. Rev. Robert Bushey Jr., a pastor from Kankakee, Ill., Came to Washington late last year to advocate for a national response. Like other members of a delegation organized by National People’s Action, Bushey had participated in unsuccessful campaigns for state-level legislation. “The wage lobby is very strong in states where wages exist,” he summed up the obstacles.
State regulators are now faced with the new challenge of responding to the rapid growth of online lending. Many online gamers operate across international and state borders, and some claim legal immunity on the basis of tribal relationships they have forged expressly for this purpose.
Effective regulation must therefore come from Washington. And the Office of Consumer Protection will need to act broadly and decisively. Too narrow a rule would only pave the way for another era of innovation in abuse and exploitation (rather than meeting the real needs of consumers).
The industry is hoping for rules that focus on short-term loans and the “rollover” issue. But the weight of the accumulated evidence highlights two key problematic characteristics that can be found in a much broader loan category. One is the use of post-dated checks and other mechanisms that allow the lender to take control of a borrower’s bank account. The other is the practice of giving loans without seriously assessing a borrower’s repayment capacity – to repay with income, that is, with the money needed for food, rent, fuel. and other urgent priorities.
This fatal combination of lending characteristics frames the challenge facing the leaders of the Office of Consumer Protection. As they have done in the mortgage market, to their great credit, they must now require consumer lenders to verify the actual repayment capacity of borrowers, not just the collection capacity of lenders. Equally important, they must allow borrowers to regain control of their bank accounts. Without the second requirement, lenders will never take the first seriously.