How do we break the payday lending debt cycle?
Published 11:56 pm Tuesday, June 7, 2016
“It is much like getting into a taxi just to ride across town and finding yourself stuck in a ruinously expensive cross-country journey.”
That’s how Richard Cordray, the director of the Consumer Financial Protection Bureau, described the vicious cycle created by the payday lending industry. Cordray was talking last week about proposed new regulations, which would require payday lenders to verify an applicant’s ability to re-pay the loan without re-borrowing at the end of the loan period.
Lenders are opposing the regulations, saying they will cripple the highly lucrative industry. Watchdog agencies are saying the proposal doesn’t go far enough to protect the interests of a vulnerable segment of our society.
The payday lending industry is for many low-income Americans a debt trap. Borrowers who cannot qualify for traditional loans from banks or credit unions turn to payday lending companies, which promise quick cash and short-term loans. Those same borrowers, however, are unable to repay the short-term, payday loans at the end of their two-week period and are forced to borrow again and again at high interest rates, incurring repeated fees as they go along. According to the CFPB, more than half of all payday loans are made to borrowers in loan sequences of 10 loans or more. For borrowers who are paid weekly or bi-weekly, one-fifth of these loans are in sequences of 20 loans or more.
And that creates the debt spiral or, as Cordray described it, the never-ending taxi ride.
The proposed regulations likely will force lenders to make installment loans instead of requiring full payment at the next payday. But those installment loans will still carry exorbitant fees. A Pew Charitable Trust study cited that a $400 installment loan would cost the borrower $350 in fees over the life of the loan.
That debt trap isn’t just hurting the low-income borrowers. Stephen Stetson, who works with Arise Citizens’ Policy Project, said for every dollar given to these lenders, $2 is taken out of the local economy. “It’s not just the borrowers that are affected. Local businesses suffer when the borrowers get stuck in the debt trap.”
He’s right, of course, but the solution isn’t easy. A recent Federal Reserve Board survey shows that 46 percent – nearly half – of American adults would struggle to meet emergency expenses of $400. Those are the people who are often forced to turn to these short-term, payday lenders for help.
Solving the underlying economic conditions that create the need for payday lenders isn’t going to happen with one set of regulations or simple policy changes. But those same policy changes could stem at least one of the symptoms caused by the need for short-term lenders, and that is an important first step.
Editor’s note: The CFPB is seeking public comment about the proposed policy changes during the next 90 days. You can add your voice at www.regulations.gov.