December 24, 2018
By Scott Astrada
Anita Monti wanted to get her grandchildren presents for Christmas. She couldn’t afford them, so she took out a payday loan from Advance America. The company promised a quick fix. Instead, the grandmother “went through hell” for several months as she was trapped in a cycle of debt. During this time, she had to get help from her church to make her rent payment. What was marketed as a small loan ended up costing Anita nearly $2,000.
Anita’s story is hardly a fluke. Trapping customers in a debt spiral is central to payday lenders’ business model — as a single graphic found in the employee training manual of one of the industry leaders makes clear.
In fact, government researchers found “[m]ore than four out of every five payday loans are re-borrowed within a month, usually right when the loan is due or shortly thereafter.” Researchers also discovered that the great majority of these businesses’ revenue derives from people with more than ten loans in a year.
In describing the experience, Anita said, “I just thought that I was a on a merry-go-round that I was never going to get off.”
Payday lenders seize money directly from borrowers’ paychecks, a frightening level of control over people’s lives.
They also charge on average an annual interest rate of nearly 400 percent(you read that correctly), which is so high that their incentive is to keep reaping re-borrowing fees instead of having the borrower repay the principle.
It is worth noting that competition among these lenders has abjectly failed to lower costs. As an annual financial report from Advance America notes about the market “the principal competitive factors are customer service, location, convenience, speed, and confidentiality.” Missing from that phrase is the word “price.”
The consequences for Americans trapped in their vicious cycle of debt are severe. Taking out a payday loan makes a person more likely to delay medical care, incur overdraft charges, lose their bank account, or file for bankruptcy.
Thankfully, relief from these financial predators may finally be in sight.
Following the 2008 Financial Crisis and Great Recession, the Consumer Financial Protection Bureau (CFPB) was established to straighten out a market that had gone astray and crack down on exploitative lending practices. Under Director Richard Cordray, it was largely successful. As part of its work, the CFPB — after five and a half years of research, analysis, and public outreach — in October of 2017 issued a rule to stop payday loan debt traps.
At the heart of the rule is the common-sense principle that lenders should check a borrower’s ability to repay before lending money. This straightforward verification measure takes into account a borrower’s income and expenses to ensure they wouldn’t have to keep re-borrowing.
The rule also applies to auto-title loans, which similarly charge triple-digit interest and frequently trap borrowers in debt, but with an additional threat: one-fifth of auto-title loan borrowers have their vehicle seized or repossessed by the lender.
Large majorities of Republican, Democratic, and Independent voters support the payday rule and its ability to repay requirement. It seems people across the political spectrum understand that loans should be affordable, or they harm more than they help.
While an interest rate cap of no higher than 36% is the most effective way to keep the payday loan sharks at bay, the CFPB’s payday rule is a significant step forward. Once in full effect, the rule would disrupt the business model of predatory lenders and help stop them from siphoning away Americans’ hard-earned wealth.
However, payday lenders are doing all they can to stop the rule before its compliance date of August 19th, 2019. They enlisted in this effort Mick Mulvaney, who was head of the CFPB until last month. While leading the CFPB, Mulvaney joined a lawsuit to indefinitely suspend the rule’s implementation and directed the agency to gut the rule. Despite Mulvaney leaving, both initiatives remain underway.
Kathy Kraninger, freshly sworn in as CFPB Director, has a choice. She can side with the payday lending grinches, helping them spring debt traps on the most vulnerable members of our society. Alternatively, she can join the spirited chorus of voices, ranging from faith leaders to veterans’ groups to seniors’ advocates, who have called for and support the rule. She can help protect consumers from the payday loan debt trap — simply by letting her agency’s own rule go into effect.
Director Kraninger will face many difficult decisions in her new role. This is not one of them.
Scott Astrada is Director of Federal Advocacy at the Center for Responsible Lending (CRL)