Today, the Senate Banking Committee convenes to discuss the confirmation of Richard Cordray, nominated to become the first head of the Consumer Financial Protection Bureau (CFPB). On this historic day, as President Obama prepares to deliver a speech addressing the nation’s continuing unemployment crisis, we urge our elected officials and the CFPB leadership to prioritize oversight of the payday lending industry.
This minimally regulated, $30 billion-a-year business offers low-dollar, short-term, high-interest loans to the most vulnerable consumers – people who, due to economic hardship, need fast cash but are considered too risky for banks. These loans then trap them in a cycle of mounting debt. With interest rates that can reach 572 percent, anyone who borrows $400 (the current maximum loan amount allowed in my state of Mississippi, although limits vary state to state) can find themselves thousands of dollars in debt.
Who gets caught in this vicious cycle? It’s not just a small, struggling subset of the American population. In these challenging economic times, people of all ages, races, and classes need a little help getting by until the next paycheck. The payday lending industry’s own lobbying arm, the Community Financial Services Association (CFSA), boasts that “more than 19 million American households count a payday loan among their choice of short-term credit products.”
But a February 2011 National People’s Action report found that the industry disproportionately affects low-income and minority communities. In black and Latino neighborhoods, payday lenders are three times as concentrated compared to other neighborhoods, with an average of two payday lenders within one mile, and six within two miles.
In 2007, a report by Policy Matters Ohio and the Housing Research and Advocacy Center found that the number of payday lending shops in the state catapulted from 107 locations in 1996 to 1,562 locations in 2006, a more than fourteen-fold increase in a decade. Nationally, the industry doubled in size between 2000 and 2004.
How payday lenders prey on poor
Previously, one of the industry’s prime targets was the US military. It preyed on service members so aggressively that Congress outlawed payday loans for active-duty troops. That was in 2006, in the wake of a General Accounting Office report that revealed as many as 1 in 5 service members fell prey to the high-interest lenders that set up shop near military bases.
One of the report’s more stunning – but by no means unique examples – concerned an Alabama-based airman who initially took out $500 through a payday lender. Due to the lender's predatory practices, she ended up having to take out so many other loans to cover that initial small bill that her total financial obligations to pay off the loans rose to $15,000.
How could this happen? With payday lending, the entire balance of the loan is due to be paid in two weeks, and the same person who did not have $500 two weeks before can rarely afford to pay the entire loan back plus $100 in fees and interest two weeks later. The borrower simply does not earn enough to live on or meet unexpected expenses, and there’s no raise or bonus in the two-week interim of the loan.
Sometimes the borrower or a family member loses his or her job in that interim two-week period, or other financial hardship arises, often in the form of medical bills. What typically happens is that the consumer renegotiates the loan, which means that the borrower pays that one loan off and then immediately gets a new loan from the lender or gets a loan from another store to cover the cost of paying off the first loan. Then the borrower is stuck with the second loan. Thus a vicious cycle ensues.
Of course, the payday industry's CFSA asserts that 95 percent of borrowers repay loans on time. But the payday lending industry as a whole penalizes a much broader swath of the American people – and economy. The rapidly growing national payday-lending crisis hurts families, businesses, and communities from coast to coast. The North Carolina-based Center for Responsible Lending found that predatory payday lending skinned American families $4.2 billion per year. That is billions taken out of the pockets of Americans – usually those who can least afford it – and the US economy.
In recognition of the fact that a loan to cover a small expense should not be a first step down a road to financial ruin for anyone, 17 states, including possible new CFPB head Mr. Cordray's home state of Ohio, currently ban or severely curtail the practice. Others, including Texas, are considering similar legislation.
But in many states, particularly in the south and Midwest, payday lenders operate with little or no regulation. My own state, Mississippi, is a prime example of payday lending gone wild. Currently, we have about 1,000 payday lending stores. That means we have more payday lending stores than we have McDonalds, Burger Kings, and Wendy’s combined. We have more payday lending stores than we do banks. In fact, Mississippi has more payday lending stores per capita than any other state in the nation.
Regulation must apply to payday lenders, too
I work with the Mississippians for Fair Lending coalition to reform lending practices. But we can't do it alone. We will need help from national policymakers willing to stand against this powerful lobby. The payday lending industry itself acknowledges that some regulation is in its best interests, and the industry's CFSA website proclaims that “the industry operates currently in 33 states and…is working to be regulated [in] all 50 states.” The CFSA’s implied hope here, of course, is to get a foot in the door in those 17 states that currently ban or curtail payday lending, and to prevent any more states from blocking or further restricting the practice.
At a time when both the need for consumer protection and creeping unemployment numbers are indisputable, Washington needs to move toward one of the key goals of the Dodd-Frank Act that created the CFPB. This goal: to better protect consumers by helping to ensure that all providers of consumer financial services – banks and nonbanks alike – are treated similarly. Lawmakers need to introduce federal payday lending reforms that bring this industry into compliance with its competitors. Chief among them must be reforms that put a cap on interest rates and lengthen repayment periods.
Regulators could also mandate that all states that still allow the payday lending practice create a statewide database of lender and borrower information. This database would make it easier to track discriminatory and predatory practices by collecting information from consumers, tracking loans, and compiling socioeconomic information about borrowers.
Of course, reforming the payday lending industry won’t eliminate people’s need for short-term loans, especially in tough economic times. But capping interest rates and lengthening repayment periods can help to ensure that payday lenders actually help, rather than gouge, individuals, families, and businesses.
Mississippi and the rest of America have learned first-hand about the high price of a broken consumer credit system, as unregulated borrowing and lending practices bring the economy to the brink. Now, as more and more people are turning to desperate measures to make ends meet, I urge our country’s leadership to review and reform the payday lending industry’s business practices.
Paheadra Robinson is the director of consumer protection for the Mississippi Center for Justice.