In a Dec. 17 blog, Jeffrey H. Joseph touts the ‘benefits’ of payday loans and the supposed dangers of a pending rule from the Consumer Financial Protection Bureau that will limit the ability of these high cost lenders to trap low and moderate income families in debt.  He further disparages the organization I work with, the Center for Responsible Lending and Self-Help, an affiliated credit union, for fighting to rein in the abuses.  To be clear, we are talking about loans with unconscionable interest rates that typically run 400 percent in the states where abusive lending is still allowed.

The posting completely mischaracterizes the payday lending model, the households that get trapped in a cycle of debt and the pending consumer protection rules to rein in industry abuses.


The author describes borrowers as those ‘without a checking or savings account.’  This is both inaccurate and goes to the fundamental problem with payday loans.  One of the few criteria for receiving a payday loan is a bank account.  The other is a paycheck. Lenders gain access to the account and, on payday, put themselves first in line to repay themselves, drain the account and leave borrowers without the necessary resources to pay other bills such as food, rent and utilities. The weak underwriting standards for these loans better assess a lender’s ability to collect than a borrower’s ability to repay the loan. 

With their bank accounts depleted of funds, borrowers return before the next paycheck to extend the loan and pay additional fees.  For roughly half of all borrowers, this pattern will repeat ten or more times. This supposed one-time, two-week quick fix becomes a financial albatross that lasts six months or more.

Weak underwriting standards and abusive and deceptive mortgage loans were at the heart of the 2008 financial crisis.  No one suggests the predatory loans peddled by this industry will have the same broad-based impact on the economy but for the families caught in these debt traps, the devastation is tragic and well documented.  This is one reason the Department of Defense recently adopted strong rules to prevent payday lenders from pushing high cost loans to service men and women and their families. 

 CRL has documented the payday loan debt trap over many years both nationally and in individual states.  Additional studies by independent researchers have found that the use of payday loans is associated with increased overdraft fees, loss of bank accounts, and even increased rates of bankruptcy. Just try to imagine the impact on struggling families that have gained a foothold into the mainstream banking system, only to lose that access due to excessive overdrafts caused by the debt trap involving triple digit interest loans. Where once these families had access to direct deposits into a bank account, now they must turn to more expensive check cashing services, prepaid cards and other higher cost forms of managing their money.  Recently The Economist dedicated an article explaining (and appropriately titled) It’s expensive to be poorin America and noted that payday lenders only add to the burden.

The author also mistakenly claims that the pending rule to rein in the abuses of payday lending will include a cap on interest rates.  Limiting the cost of these loans through rate caps is the most effective way to reduce the harm and several states have enacted laws to do so. The consumer agency does not have that authority but they do have effective tools of their own.  Instead, when extending small dollar credit, the rule will likely require the common sense practice of ensuring a borrower has the ability to repay the loan without having to re-borrow to meet ongoing expenses.  The lender must look at a borrower’s income and expenses and assess that they can afford the payment before issuing the loan.  This basic principle is common practice among other types of lenders. Small dollar lenders, especially given the financial vulnerability of these borrowers, should be required do the same.

The author is correct that this rule will change the market.  The predatory lenders will either change their practices or exit the market.  And for that the consumer agency should be applauded.

For the record, yes, the Self-Help Credit Union offers small dollar loans all for less than 36 percent APR, a widely recognized standard for affordable small dollar loans.  We welcome all others into the market who are willing to offer affordable loans that avoid the debt trap.  And we are not alone.  In fact, more than 500 credit unions offer alternatives to payday loans at rates around 36 percent APR, with most of the rates far less.

We believe the new rules will drive positive innovation and already we see new entrants to the market. Some of these new lenders are responsible, others are less so.  We don’t know yet precisely what the final rule will look like but the Center and the broad coalition of consumer advocates, faith leaders and civil rights groups will not back away from calling for an end to predatory practices that prey upon working families and trap them in prolonged cycles of debt.

Kalman is executive vice president for the Center For Responsible Lending.