Knowledge is power, and this is especially true when it comes to financial literacy. Gimmicks like “skeptical payday loans” and “E-Z Credit” companies’ prey on this lack of information while taking their toll on families and many in urban neighborhoods. As a matter of fact, according to the Center for Responsible Lending, these companies are heavily concentrated in Black and Latino communities across California.
Some states, particularly Utah, have relatively loose limits on the interest rates that banks chartered within their borders can charge. Those banks sometimes work with high-cost lenders to offer loans with rates above what Colorado and other stricter states would otherwise allow — an arrangement that consumers advocate deride as the "rent-a-bank" model. That approach is "saddling working families with high-cost debt," said Ellen Harnick, director of state policy at the Center for Responsible Lending. Other states should follow Colorado's lead and prevent their residents from being charged
“It meant that the entire industry had to move to a safer product, or bear increased financial risks to their own balance sheets,” said Mitria Spotser of the Center for Responsible Lending (CRL).
Minnesota's law is not a flat out 36% rate cap, but by putting strict limits on payday loans with rates between 36% and 50%, it could drastically reduce the product's availability. The law will "disrupt the predatory business model" of payday lenders so that they stop "creating long-term debt traps for consumers," said Yasmin Farahi, deputy director of state policy at the Center for Responsible Lending.
These apps make money in a variety of ways, including subscription fees, fees to speed the arrival of your money and tips. “They’re basically just making payday loans,” said Andrew Kushner, policy counsel at the Center for Responsible Lending, of the direct-to-consumer companies. “This is what payday lenders do.”
Online lenders have used the Avant and Marlette settlements as a model, choosing to get a state license and be supervised by Colorado financial regulators. Those fintechs are considered the “true lender” in a transaction, not their out-of-state bank partners. But the settlements addressed misconduct only after it occurred, said Ellen Harnick, the director of state policy at the Center for Responsible Lending. The Colorado bill that opts out of DIDMCA provisions prevents violations of Colorado interest-rate laws from happening in the first place, she said.
“The debt trap is very much by design and it’s how payday lenders’ business model works,” said Yasmin Farahi, deputy director of state policy and senior policy counsel at the Center for Responsible Lending. “They succeed by making sure their customers fail. They target low-income communities and communities of color, and it’s a model that’s based on their customers failing, essentially, for them to stay in business and generate fees.”
Interest rates on payday loans can run into the hundreds of percentage points. The Center for Responsible Lending reported Delaware’s rate runs nearly 400%
Seventy-five-year-old Army veteran Lester Rodgers, Jr. lives in Chatham County on a fixed income. When his wife passed away, he worried that he would not have enough money to keep his home. Lester saw a TV ad from Themis Law, PLLC, which claimed to be a national law firm located in Washington, D.C. with expertise in saving peoples’ homes. In reality, Themis is a debt settlement company operated by the founder from his home.
“People are struggling,” said Andrew Kushner, senior policy counsel for the Center for Responsible Lending, an advocacy group. “If you get money this week, that’s less money to pay your expenses next week and you’re even worse off because of the fee.”