Finally, Real Action on Predatory Payday Lenders in the USA

maxubage358New Orleans   Well, now we’re talking! The Consumer Finance Protection Bureau (CFPB), what a name, is stepping up big time with new rules to rein in predatory practices of payday lenders. Just because they have storefronts dotting ubiquitously in lower income neighborhoods does not mean they are small fry. This is over a $46 billion business with 16,000 lenders collecting $7 billion in fees that, despite a patchwork effort by some state regulators, still goes crazy fleecing people in thirty of the states.

So, here’s the deal. The CFPB says that they are going to insist, perhaps as soon as the beginning of 2017, that lenders will have to prove what we call “affordability.” They will have to independently establish that a potential borrower has income and that the income is sufficient to allow them to afford to repay the money that they are seeking to borrow. Furthermore the CFPB is reportedly going to cap the number of rollovers of the original loan, and that’s almost as critical as the affordability test. From ACORN’s research, and extensive studies we have done in Canada, the whole business model that drives payday lending is recidivism, rolling over the original loan multiple times with additional fees and interest charges, and coming back, over and over again for more.

We’ll have to see the final published regulations to know how tightly the CFPB is going to monitor these rules. We have been demanding in Canada a central database that would keep a family from jumping from one payday lender to another and getting caught in the debt trap, but it is hard to tell if the CFPB has been willing to take that step yet, though it is well needed.

The CFPB is also proposing that before a payday lender debits a borrower’s account they will have to provide three days’ notice. This could prevent larding on of bank fees, which exacerbates the original debt.

Is this fight over or just beginning? Well, it’s really just what-and-what. The rules will be subject to public comment until mid-September, and the industry – and its political friends – can be counted on to fight furiously even over these measures, which also leave a lot to be desired. There’s no cap on the level of debt that would be deemed affordable. There’s no clear standard on what defines affordability. There’s no cap on fees or interest rates. There’s no clarity on pyramiding loans from multiple lenders. There’s no disclosure of the larger banks and institutions that are providing the money for these loans.

You get the message. This is a first step, not the last. But, it’s a start to bringing this industry under control nationally, and that’s something that will matter greatly to many low-and-moderate income families.

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The Paradox and Problem of Payday Lending

A customer enters a Payroll Advance location in Cincinnati. (Al Behrman / AP)

A customer enters a Payroll Advance location in Cincinnati. (Al Behrman / AP)

New Orleans  Here’s an irony that is stark, yet impossible to really appreciate or enjoy. The Atlantic billed its most recent issue as “The Money Report.” The cover article was built around the premise that almost half of the American people have trouble coming up with $400, when there is a financial bump in their road. There was another article called “Loan Shark, Inc.” which was a probing and somewhat sympathetic article about the payday lending industry that mentioned that the average payday loan is $350, about the same number repeatedly cited in “The Shame of the Middle Class,” yet of all the tales of woe from its author, there was no mention of his ever going so low as walking through the doors of a storefront payday lender or the portals of one online.

Without a word of warning or explanation, it was assumed that clearly payday lenders were all about exploited lower income families, not the presumptuous middle class. The real line of demarcation they were unwilling to draw is that even if half of the middle class finds themselves in dire straits from time to time, it’s not catastrophic since they still have other informal places to go with family and friends or selling assets or reducing their footprint, while the poor are forced into predatory fringe financing once there is no place else they can go.

In the classic dilemma of neoliberalism, the payday lending article worried around the issue of alternatives between the devil and the deep blue sea. The polarity was presented as either payday lenders or worse, loan sharks, shysters, and gangsters. The role of government was limited only to regulation, and regulation was presented as problematic because when government stepped up to protect consumers from predatory practices, the marginal and inefficient payday lending industry shut its doors. In the USA New York and other states were given as examples of the industry fleeing when interest rates were reduced, and rather than applause there was handwringing. In Canada, where ACORN has been a dog on a bone chasing predatory lenders for over a dozen years, a 30% limit on interest rates in Quebec saw the payday people fleeing like rats on a sinking ship. ACORN has backed caps, though not that low, and industry record sharing that prevents multiple loans to one customer in the same period, as well as restrictive zoning limits in our neighborhoods among other reforms. ACORN also backs postal banking which The Atlantic gives short shrift.

Their best recommendation comes from what they admit are “more-modest reforms” in Colorado in 2010 that were achieved “by reducing the permissible fees, extending the minimum term of a loan to six months, and requiring that a loan be repayable over time, instead of coming due all at once.” Half the payday lending operations closed, but the ones that stayed open ended up with more than the average 500 annual customers and borrowers paid “42 percent less in fees,” and defaulted less “with no reduction in access to credit.” One hand clapping, I guess.

The author was right to understand that the real problem for families is desperately needing $350 with no other alternatives. Why are we wringing our hands about a predatory industry rather than stepping up and understanding that this is a collective responsibility? These are the kinds of problems that emergency assistance grants in welfare offices used to try to meet. The absence of a continued public response makes these private problems, increases hardship and inequality, locks people in a debt trap, and has led to the creation and growth of an industry where competition is irrelevant, inefficiency is rampant, and even reformers wring their hands and settle for sorry solutions.

Public welfare is exactly that, faring well for the public. When are we going to stop embracing the 19th century and start building the 21st?

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