Proposed federal rules on payday lending's exploitation deserve support, need improvement

Payday lending costs 12 million vulnerable, low-income workers excessive interest payments each year. Federal regulations propose to end the "debt trap" of predatory short-term lending and need both support and improvement.

/PM BlogSpace Report/ There’s an army of sharks that attacks 12 million Americans every year and we’re not talking about the ocean-going kind.  We’re talking about predatory payday loan sharks. You, or somebody close to you, may have been in sudden need of more money than you had on hand. That’s where it can start.

One woman’s story, from the People’s Action Institute, sets the stage

Candice narrates: “I had a good job, but no credit.  When my job suddenly cut my hours, I was forced to turn to a payday lender to make ends meet.  Instead of helping me get through a hard time, payday loans sucked my family into a nightmare cycle of debt. In order to pay the outrageous fees and interest on my first loan and have enough left over to feed my kids, I had to take out another loan, and then another. I went from dreaming of buying a car and finding a better apartment for my kids to barely scraping by while almost my entire paycheck went straight into” the pockets of predatory payday lenders. My credit score dropped from the 700s to the 300s. I lost my car, my apartment, job opportunities and even had trouble getting a student loan to continue my education.

This story is far from unique.  There are nearly as many payday lending storefronts in the United States as there are McDonalds and Starbucks combined, in addition to tens of thousands of unscrupulous car title and online style loan sharks. These lenders target communities of color and poor communities with outrageous interest rates. The average interest rate is 391% APR (annual rate) for short-term loans, and it can be even higher for online loans. One in five car title loan borrowers has the vehicle seized, often after paying more than the original loan amount in payments and fees.  Payday after payday, these payday predators bleed their victims dry as bills pile up and borrowers default on credit cards, lose bank accounts and cost our economy millions.

 Maryland is better off than some states, having recently upgraded laws against payday lenders – though it remains a battle to plug their loopholes. The District of Columbia flatly bans payday lenders but Delaware is not so well off, having no cap on loan interest. Low-income agricultural workers on Maryland’s Eastern Shore, often living close to the edge, can get exploited easily by just crossing the state line. Virginia is similar to Maryland, though it has (like most states) a $500 cap on payday loans compared to Maryland’s $1,000, but a higher cap on the loan interest rate.

With this patchwork of state laws, forthcoming federal regulation is welcome but needs support and improvement. (You can see a great US map showing states where these sharks swim most freely at this article from The Intercept.

Today, we finally have a chance to stop the payday loan shark feeding frenzy.  The Consumer Financial Protection Bureau (CFPB) has issued the first national rules to regulate small-dollar lending nationwide. These rules are a start, but they are far from strong enough to protect our communities from the persistent, predatory practices of this industry. There are too many loopholes that might allow payday lenders to get around the ability-to-pay standard and not enough protections against abusive and deceptive lending practices.  We need rules that ensure that every loan has basic underwriting and meets the ability to repay standard. We need rules that limit the number of loans and the total number of days borrowers can be trapped in the debt cycle each year.  Only then can truly responsible small dollar lending have a chance to compete.

Since the CFPB started its rule making process last March, payday predators have stripped more than $10 billion out of the pockets of hard-working families. The payday loan industry has bought itself a huge megaphone in Washington with the billions of dollars that it wrings out of our distressed communities. In just the last two years, the industry has spent $13 million in political donations and in lobbying Congress against reasonable rules.  Now it is our turn to be heard.  The CFPB must live up to its mission and protect the millions of American families who are harmed by abusive lending every year. 

Abusive payday loan sharks have a history of swimming through loopholes. We won’t let it happen again. Now that the draft rules are public, we finally have the chance to make our voices heard. For the next 90 days, we must make sure the CFPB knows that our communities are counting on a rule that ends the debt trap once and for all.  We intend to fight for the strong payday lending rule that we deserve.  Progressive Maryland is joining this nationwide fight; Marylanders must support better protections against this predatory lending.

 Send your comments to the CPSC on the proposal here