February 24th, 2015|
Would you take out a loan at 300% interest? Millions of people do it. The promise of fast cash regardless of credit history. The payday loan industry aggressively preys on the poor — people who are so up against it that they will agree to the obscene terms of the loan. They target the poor, setting up stores in poor neighborhoods and making billions off the misfortunes of the local population. According to the Consumer Financial Protection Bureau, created after the economic implosion in 2008 with a mandate to protect consumers from lending abuses, the median annual income of a payday borrower is $22,400.00. Nearly 70% use the loans to cover basic expenses. The prevalence of such loans underscores the fact that millions of Americans are living paycheck to paycheck. In a Pew Charitable Trust Research Study, only about 14% of the people who borrow money through a payday loan can pay it back and 41% need outside help just to pay off the payday loan. Few borrowers can actually pay the loan back within the contractually required two week time frame. 80% of the loans were rolled over or another loan was taken out, adding on more fees. The Bureau found that over the course of a year, borrowers took out an average of 10 loans with a median fee of $458 on a loan of $350. Borrowers who took out 11 or more loans generated roughly 75% of the fees collected by the lender. “Much of the business model is based upon repeat borrowers,” according to the Center for Responsible Lending’s President, Michael D. Calhoun.
Recognizing the serious problem presented by these loans, and understanding that some form of credit is essential to so many of the working poor, the Consumer Financial Protection Bureau has been drafting federal regulations to govern a variety of payday loans and other short term loans. The rules are expected to require lenders to determine whether the borrower can actually pay back the loan, including the interest. The law will require the lender to look at income, existing debts and payment history – just the kinds of things that many lenders failed to do, leading to the economic catastrophe of 2008. The proposed regulations will require additional scrutiny when a borrower seeks a second loan without repaying the initial loan, and limit the number of times a loan can be rolled over in a 12 month period. But the fight over regulating payday loans is not just taking place on a national level. States have been grappling with this problem for years. 35 states have no limits on the frequency of such loans so the proposed new regulations may offer some protection. But the loan industry, flush with lobbyists, is pushing back, attempting to carve out exceptions, particularly in states with already existing pay day loan regulations. For instance, in Washington State borrowers cannot take out more than eight loans in a 12 month period. Lawmakers backed by payday lenders have introduced a bill seeking to double the number of annual loans. Arizona banned pay day lending altogether, only to have them pop up as “car title” lenders. In Ohio, the law limits the annual percentage rate of a pay day loan to 28% and prohibits unfair debt collection practices.
Federal regulation, so long as it does not undermine existing state regulation, can go a long way toward curbing the predatory abuses of the payday loan industry.