Swimming Against the Loan Sharks

Federal regulators have proposed new rules to rein in payday lenders, and those of us who’ve been fighting these legalized loan sharks for years are bracing for a major backlash from the industry while also pushing for tougher standards.

Issued by the Consumer Financial Protection Bureau (CFPB), the proposal comes after years of grassroots pressure — in the face of nasty opposition by loan predators

The lobby group that represents this industry, the Community Financial Services Association of America (CFSA), immediately went on the attack, portraying itself as the victim and as having borrowers’ best interests at heart.

This is rich, coming from an industry that has trapped millions of Americans in a downward spiral of debt. Here’s how classic payday lending works. Lenders give customers a short-term cash advance, typically for two weeks, against their paycheck or Social Security check. But most borrowers can’t pay back the loan when it comes due because lenders don’t do basic underwriting. Instead, lenders rely on the fact that that the loan is unaffordable so they can keep people trapped in debt.

The CFPB has found that four out of five payday loans are rolled over or renewed within 14 days. Their study also shows that the majority of all payday loans are made to borrowers who renew their loans so many times they end up paying more in fees than they originally borrowed. On average, these “preyday” lenders collect 75 percent of their fees from people stuck in more than 10 loans a year with exorbitant interest rates, often 300 percent APR.

Longer-term installment payday loans are marketed as less predatory, but in reality they’re payday on steroids. Installment payday loans carry all the same hallmarks of the debt trap: no underwriting, triple-digit interest rates, repeated refinancing, and direct access to borrowers’ checking accounts.

Lenders can still debit money directly from their customers’ bank accounts, meaning the loan sharks get top priority for payment — over bills for groceries, medicine, or school supplies. And if the money isn’t there, they just keep hitting the account, racking up overdraft and other fees on top of the unaffordable loan payment, often leading to account closures.

The stories of those who’ve been caught in this debt trap are wrenching.

One woman in Wisconsin, for example, cashed out her retirement savings of $28,000 to help her daughter get out from under a payday loan that started as just a few hundred dollars to help pay the bills. A man in Alabama took out a title loan for $400 to pay the copay on his wife’s medicine. He paid $100 a month for nine months, but that only paid down the interest. When he missed a payment in the tenth month, the lenders took his truck.

Where does all that money from low-income borrowers wind up? Most of these payday lenders are privately held, so they’re not required to report how much their top executives pocket in pay every year. But just one of the publicly held firms, EZCorp, gives you a good idea of where the dollars are flowing.

Last year, EZCorp paid their CEO, Stuart Grimshaw, $7.5 million in total compensation. This is a firm that the CFPB fined $10 million in December 2015 for illegal debt collection practices, including harassing their customers at their homes and workplaces and unlawfully withdrawing funds from their bank accounts.

EZCorp and others in the payday industry can be expected to flood the CFPB with demands to water down the proposed rules. They’ve already been trying to move their agenda in Congress, pouring $13 million into efforts to delay and weaken the rule and failing that, to gut the CFPB altogether.

Meanwhile, my organization, People’s Action Institute, is working with a broader Stop the Debt Trap Coalition to demand that the proposed rules be made even stronger. We plan to generate tens of thousands of letters to the CFPB from borrowers, faith and community leaders, and people of conscience by the September 14 deadline for public comment. Our key message is that while this proposal is a step forward, it still exposes American families to unacceptably harmful lending practices.

For example, lenders should be required to ensure that every loan they make is affordable, based on the borrower’s income and expenses. But under the proposal, up to six short-term loans a year to one individual are exempted from this requirement. Even one unaffordable loan can be devastating.

The rule should also do more to stop the constant loan rollovers and refinances that are rife in the industry and are hallmarks of the debt trap. The CFPB’s plan would allow too many repeat short-term loans, and not enough restrictions on payday installment loan refinances.

Also, the proposal must seriously enforce underwriting requirements. Currently lenders can show evidence that their loans are affordable merely by not having default rates worse than other payday lenders. Low default rates in the payday industry are evidence of coercion — not evidence that loans are affordable.

We cannot allow payday lenders to continue business as usual. Everyone who cares about economic justice should tell federal regulators to stop the debt trap once and for all.