On March 25, Consumer Finance Protection Bureau (CFPB) director Richard Cordray will host a field hearing on payday loans at Nashville's Downtown Public Library.
The financial crisis prompted many federal and state legislators to pass reforms to curb abusive lending practices, but Center for Responsible Lending President Michael Calhoun notes that the protections generally do not extend to payday loans. Typical payday loans are about $350, have annual interest rates of about 391 percent, and often requires the borrower to provide the payday lender with direct access to his or her checking account. Calhoun says this means payday lenders have no incentive to gauge borrowers’ ability to repay debt. Payday lenders’ best customers are those who cannot afford to pay off their loan, as it can lead to a cycle of repeat borrowing. Sixty percent of payday lenders' fees come from borrowers who take out more than 12 payday loans in a year.
Congress set a 36 percent interest rate cap on loans to military members and their families, but Calhoun suggests that this interest rate be extended to all Americans. Payday borrowers are at higher risk of losing their bank account, becoming delinquent on other debts, or filing for bankruptcy. Families burdened by debt also cannot help the local economy.
The CFPB this year is expected to issue new rules governing all payday loans. The agency may establish new safeguards, such as making sure that lenders underwrite loans properly and that borrowers can repay on time.