Today, the Senate Banking Committee meets to discuss the confirmation of Richard Cordray, appointed to become the first head of the Consumer Financial Protection Bureau (CFPB). On this historic day, as President Obama prepares to deliver a speech on the country’s lingering unemployment crisis, we urge our elected officials and CFPB leaders to prioritize monitoring of the payday lending industry.
This loosely regulated $ 30 billion a year company provides low-cost, short-term, high-interest loans to the most vulnerable consumers – people who, due to economic hardship, need quick cash but are seen as vulnerable. too risky for the banks. These loans then trap them in a cycle of increasing debt. With interest rates as high as 572%, anyone who borrows $ 400 (the current maximum loan amount allowed in my state of Mississippi, although limits vary from state to state) can find themselves in debt of up to thousands of dollars.
Who is caught in this vicious cycle? It’s not just a struggling small subset of the American population. In these tough economic times, people of all ages, races and classes need a little help getting through until the next paycheck. The payday loan industry’s own lobbying arm, the Community Financial Services Association (CFSA), boasts that “over 19 million American households have a payday loan as one of their short-term credit product choices.” .
But a February 2011 report from National People’s Action found that the industry disproportionately affects low-income and minority communities. In black and Latino neighborhoods, payday lenders are three times more concentrated than in other neighborhoods, with an average of two payday lenders within a mile and six within two miles.
In 2007, a report from Policy Matters Ohio and the Housing Research and Advocacy Center found that the number of payday loan stores in the state increased from 107 locations in 1996 to 1,562 locations in 2006, an increase of more than fourteen in a decade. Nationally, the industry doubled in size between 2000 and 2004.
How payday lenders prey on the poor
Previously, one of the the main targets of the industry were the US military. He attacked the military so aggressively that Congress banned payday loans for active-duty troops. This was in 2006, following a General Accounting Office report that revealed that up to 1 in 5 servicemen fell prey to high-interest lenders who set up shop near military bases.
One of the report’s most startling examples – but by no means unique – involved an Alabama-based aviator who initially withdrew $ 500 through a payday lender. Due to the lender’s predatory practices, she had to take out so many more loans to cover that small initial bill that her total financial obligations to repay the loans increased to $ 15,000.
How could this happen? With payday loans, the entire loan balance has to be paid off within two weeks, and the same person who didn’t have $ 500 two weeks ago can rarely afford to pay off the entire loan plus $ 100 in fees and interest. two weeks later. The borrower is simply not earning enough to live or face unforeseen expenses, and there is no increase or bonus during the two week loan period.
Sometimes the borrower or a family member loses their job during this interim two-week period, or other financial difficulties arise, often in the form of medical bills. What usually happens is that the consumer renegotiates the loan, which means the borrower repays that loan and then immediately gets a new loan from the lender or gets a loan from another store to cover the cost of repayment. of the first loan. Then the borrower is stuck with the second loan. Thus follows a vicious circle.
Of course, the payday industry CFSA says that 95 percent of borrowers pay off their loans on time. But the payday loan industry as a whole penalizes a much larger segment of the American people – and the economy. The growing national payday loan crisis is hurting families, businesses and communities from coast to coast. The North Carolina-based Center for Responsible Lending found that predatory payday loans have flayed American families $ 4.2 billion per year. These are billions taken out of the pockets of Americans – usually those who can least afford it – and of the American economy.
Recognizing that a loan to cover a small expense shouldn’t be a first step to financial ruin for anyone, 17 states, including Mr. Cordray’s home state of Ohio possibly new CFPB leader, prohibit or significantly reduce training. Others, including Texas, are considering similar legislation.
But in many states, especially the South and Midwest, payday lenders operate with little to no regulation. My own state of Mississippi is a prime example of a payday loan gone wild. Currently we have about 1,000 payday loan stores. This means we have more payday loan stores than McDonalds, Burger Kings, and Wendy’s combined. We have more payday loan stores than banks. In fact, Mississippi has more payday loan stores per capita than any other state in the country.
Regulations should also apply to payday lenders
I’m working with the Mississippians for Fair Lending coalition to reform lending practices. But we cannot do it alone. We will need the help of national decision-makers ready to oppose this powerful lobby. The payday loan industry itself recognizes that some regulation is in its best interest, and the industry’s CFSA website proclaims that “the industry currently operates in 33 states and… strives to ‘be regulated. [in] all 50 states. The CFSA’s implicit hope here, of course, is to get its foot in the door of the 17 states that currently prohibit or restrict payday lending, and prevent other states from blocking or further restricting the practice.
At a time when both the need for consumer protection and rising unemployment are indisputable, Washington must move towards one of the key objectives of the Dodd-Frank Act who created the CFPB. This objective: better protect consumers helping to ensure that all providers of consumer financial services – banks and non-banks – are treated equally. Lawmakers must introduce federal payday loan reforms that bring this industry into line with its competitors. The main one must be reforms that cap interest rates and lengthen repayment periods.
Regulators could also require all states that still allow the practice of payday lending to create a state-wide database with information on lenders and borrowers. This database would facilitate the monitoring of discriminatory and predatory practices by collecting information from consumers, tracking loans and compiling socio-economic information on borrowers.
Of course, reforming the payday lending industry will not eliminate the need for people to take out short-term loans, especially in times of economic crisis. But capping interest rates and extending repayment periods can help ensure that payday lenders are actually helping, rather than abusing, individuals, families and businesses.
Mississippi and the rest of America have learned firsthand the high price of a failing consumer credit system, as unregulated borrowing and lending practices bring the economy to the brink of collapse. Now, as more people look to desperate measures to make ends meet, I urge the leaders of our country to review and reform the business practices of the payday loan industry.
Paheadra Robinson is the director of consumer protection for the Mississippi Center for Justice.