Payday lenders are taking a beating of late. From the caustic segment on Last Week Tonight with John Oliver urging potential payday loan customers to do “literally anything else” in a cash crunch to recent news that a New York District Attorney charged a local payday lender with usury, the news has not put the industry in a positive light.
With the Consumer Financial Protection Bureau (CFPB) poised to issue rules to rein in abusive payday lending, the timing couldn’t be better. What’s clear now – to anyone following these developments – is that there is a real need for strong, robust oversight of the payday lending industry.
Sadly, the “financial success” of the industry appears to be less attributable to consumer satisfaction than to a debt trap that captures borrowers in a cycle of repeat loans. In fact, 76 percent of all loans (or $20 billion of the estimated $27 billion) are to borrowers who take out additional loans to pay the previous ones. Consumers pay $3.4 billion annually in fees alone. Consider that in Washington State lenders continue to fight for repeal of a law to limit the number of loans to 8 per year. Lenders market their payday loans as a one-time solution for a short-term cash flow problem, but their opposition to an 8 loan per year limit speaks volumes about their true business model.
But the real tragedy is not simply in the data but the stories of devastation. These loans, marketed as a simple, short-term solution for borrowers facing a cash crunch are actually structured to create a cycle of debt. Recent CFPB action against one of the nation’s largest payday lenders, Ace Cash Express, revealed that the company went so far as to create a graphic to illustrate the business model in which the goal is to get the consumer a loan he or she “does not have the ability to pay” – and then push re-borrowing accompanied by new fees. Not only are the interest rates astronomical–391 percent on average -- but the entire loan, interest and principal, are due on your very next payday. The combination of these factors proves untenable for many families.
Unlike many other creditors, payday lenders have little incentive to determine whether borrowers can repay their loan. In exchange for the loan, lenders hold on to a signed check or require access to the borrower’s bank account, ensuring that they get their money on time even if that forces the borrower into missing other payments and incurring overdrafts or other additional fees and interest.
Americans across the board agree that this practice is unacceptable – and thankfully, some states and Attorneys General have put a halt to the payday debt trap. North Carolina, New York and 19 other states (including D.C.) have passed caps on interest rates or taken other steps to curb the cycle of debt. Lenders have skirted these restrictions by going online, re-categorizing themselves as “mortgage” or “installment” lenders, or even partnering with Native American tribes to try and evade state laws. Thankfully, as we’ve seen this week, state and federal regulators have been persistent in enforcement.
As a country, we can and should do better than allowing 300+percent payday loans to push people out of the financial mainstream. The time has come for a comprehensive national rule that ends the payday debt trap.
Kalman is executive vice president and federal policy director of the Center for Responsible Lending.