New federal regulations should be as strong as Pennsylvania’s
April 26, 2015 12:00 AM
Pay Day Loans, cash, empty pockets, no money
By Greg Simmons
Payday lending is the La Brea Tar Pits of consumer credit: Like the woolly mammoths of old, people get stuck, they struggle for a while and then they expire. But a new federal effort to create fair national standards for small-dollar lending is in the works and those struggling consumers may finally find a path out of the mire.
For the uninitiated, payday loans are short-term balloon loans that are due in full, plus interest, on the borrower’s next payday, hence the name. Finance charges vary by state, but can be the equivalent of between 260 percent to more than 600 percent annually. Borrowers are required to provide the lender with access to their bank accounts as collateral, ensuring that repayment will take priority over more important expenses such as rent, utilities or childcare.
Repayment terms — which can often exceed half of a borrower’s take-home pay — are intentionally structured to be unaffordable, creating a bi-weekly budget deficit that borrowers usually fill immediately with another payday loan, and then another and another.
The results are predictable: As other bills become delinquent and bank accounts go negative, borrowers can suffer complete financial collapse. For many, what may begin as a responsible attempt to meet a short-term emergency expense becomes a hamster wheel of debt dependency. Seventy-seven percent of payday loans go to people who have taken 10 or more consecutive loans, and the typical payday borrower is indebted more than 200 days per year. The median income of a payday borrower is just $22, 000 per year.
Pennsylvania law caps the finance charges that state-licensed lenders may charge at about 24 percent annually. Unable to charge the triple-digit rates they claim are necessary to be profitable, most payday lenders choose not to do business here. With strong bipartisan support, the commonwealth, along with 14 other states, has been part of a national trend to maintain or strengthen safeguards that promote a safe consumer-credit environment.
For states with less-effective lending supervision, the federal Consumer Financial Protection Bureau has taken up the issue. When it was created in 2010, the bureau was specifically charged with examining payday lending and given broad authority to craft new regulations. It has now released a working proposal to rein in the worst abuses.
Payday lenders are fully aware that most of their customers cannot afford to repay and retire a loan in just two weeks and that most of their borrowers will take another loan immediately to keep themselves afloat. The CFPB’s proposal revolves around two key common- sense ideas: Loan payments should be affordable, and they should pay off the entire debt in a reasonable amount of time.
Lenders would be required to determine what payments borrowers can afford based on their income, debts and expenses, and offer credit terms accordingly. Borrowers will know at the outset how many payments they’ll have to make, and that their loans will be paid off when those payments are complete. No lender should ever knowingly lend money to a borrower on terms the borrower cannot afford to repay.
Unfortunately, likely bowing to pressure from an industry that sees these common-sense regulations as an existential threat, the CFPB’s proposal also floats a couple less-than-consumer-friendly ideas. One would allow lenders to make three back-to-back loans under the current model, take a 60-day break, and then restart the process, unnecessarily enshrining the existing destructive cycle of debt.
Another proposal would allow lenders to ignore borrowers’ other obligations, enabling them to set unaffordable repayment terms while claiming ignorance of borrowers’ true financial capacity (or more likely, lack thereof).
The CFPB has no business supporting lending that perpetuates these unfair and abusive practices and should eliminate these loopholes from its final regulation.
Of course, the simplest way to prevent abuses by payday lenders is to cap the interest rates they’re allowed to charge consumers. The CFBP does not have the authority to set limits on interest rates, but individual states do. New federal rules will not weaken or supersede Pennsylvania’s rate cap, leaving the most effective protection firmly in place.
In recent years, payday lenders have aggressively lobbied Harrisburg for changes to the law that would allow them to strip mine Pennsylvania con-sumers with finance charges. The General Assembly should continue to resist those entreaties and safeguard the consumer protections we now enjoy.
Any lender that knowingly jeopardizes the finances of its own customers with unaffordable loans is, by definition, acting irresponsibly. Like loan officers who wrote millions of mortgages knowing they would fall into foreclosure, or stockbrokers knowingly selling risky securities to elderly clients who couldn’t afford the losses, there is a simple admonition: Just because someone can make a buck doesn’t mean they should, or should be allowed to.
Responsible lenders should make credit available to responsible consumers. Consumers who don’t qualify should take personal responsibility, resolve their credit issues and regain their ability to borrow from reputable lenders. Payday lenders that troll financially distressed people with debt traps are not responsible lenders, and public policy should not support them simply to preserve their ill-gotten profits.
Greg Simmons is policy and asset manager for ACTION Housing Inc., a Downtown-based nonprofit organization that helps people find housing they can afford (actionhousing.org).
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