New rules proposed by the Consumer Financial Protection Board handcuff predatory lenders who made short-term loans that couldn't be repaid and had to be rolled over. That's the sleazy business model that made these predators huge profits at the expense of working families.
/PM BlogSpace Report/ The Consumer Financial Protection Bureau this week released long-awaited rules governing payday lending, which the New York Times called “an area of the lending market that has been operating as something of a Wild West.” Advocacy groups for social and economic justice – such as Progressive Maryland – hailed the move.
The Times said the industry “could soon be gutted” by the rules announced Thursday. “The Consumer Financial Protection Bureau said the median fee on a storefront payday loan was $15 for every $100 borrowed.”
The typical APR for short-term loans could be nearly 400 percent ($300 for thirty days requires $75 interest = $375 or 391 percent annually). “…the market is flourishing in at least 30 states. Some 16,000 lenders run online and storefront operations that thrive on the hefty profits,” the Times said.
“We’ve been working toward this day for years,” the Times quoted George Goehl, an executive director of People’s Action Institute, a group that fights for racial and economic justice. “For decades, predatory payday lenders have gotten away with taking money from people who didn’t have much to begin with.”
The loans, made against the promise of a paycheck payback, must under the regulations be issued only with some assurance that the paycheck can cover not only the loan payment but other essential expenses too, such as housing, utility bills, and food.
Payday lenders now must do what the predatory lenders of the 2008 mortgage crisis failed to do—ensure that there’s evidence that the loan is repayable. That means getting information about income, outstanding loans and basic housing and living expenses from the borrower.
Lenders must ensure that for 45-day term loans the lender has the resources and income to meet all expenses plus the loan payment for the next 30 days. For longer term loans, the information has to cover a longer period.
A definition of principle in the regulation is: "It is an abusive and unfair practice for a lender to make a covered longer-term loan without reasonably determining that the consumer will have the ability to repay the loan."
The entrapping nature of the loans – and the reason the profits are so high – was described by CFPB director Richard Cordray to the Times: “The very economics of the payday lending business model depend on a substantial percentage of borrowers being unable to repay the loan and borrowing again and again at high interest rates.” This cycle would be broken under the new rules by a required one-month cooling off period after three consecutive loans had been issued.
Though payday lending most heavily affects low-income workers, a surprising number of the US middle class – 47 percent of all adults at all economic levels surveyed – told a recent survey by the Federal Reserve that if suddenly hit with an immediate need for $400, they could not come up with it unless they borrowed it or sold something of value.
"In Maryland we are fortunate enough to have regulations that largely protect Maryland borrowers from predatory pay-day lending practices. We hope that the CFPB implements the strongest rules possible in order to protect working families," said Larry Stafford, Progressive Maryland’s executive director.
Maryland law restricts payday lending to less than the national average rate. Under current Maryland law, legal loans have an annual (APR) interest cap: “The interest rate a lender may charge for any loan with an original principal balance of $2,000 or less is 2.75 percent interest per month on that part of the unpaid balance not more than $1,000. Therefore, a lender is permitted to charge a maximum annual interest rate of 33 percent on loans up to $1,000.” If the loan is over 1,000 the monthly percentage cap drops to 2 percent and the maximum APR to 24 percent, according to advice from the Commissioner of Financial Regulation (within the Department of Labor, Licensing and Regulation). The low profitability in Maryland compared to other states, observers say, has kept the industry at a low ebb in the state.
Maryland has, however, in recent years struggled with stopping illegal online payday lending by cutting off their funding sources at legal banks.
And Maryland law, unlike the new CFPB regulation, has no provision for “underwriting” – that is, determining if the loan is repayable by considering the borrower’s income and other financial requirements. That is what banks are required to do, and what predatory lenders for home mortgages dodged through their “no-documentation” practices that put borrowers in overpriced homes they could not afford and brought the financial collapse of 2008.
Payday lending in its current predatory form in 30 states brings financial collapse to individual households every day. The CFPB regulations, with their modest requirements for underwriting for the payday loan industry, should reduce that harm, including in Maryland.