Front & Center: Closing credit's revolving door
It sounds so easy. Crisis arises, but your wallet's full of cobwebs. Solution? Visit a payday lender. Yet, the commercials conveniently ignore the steep interest rates that can soar as high as 650 percent annually for lump-sum loans. Now the Consumer Financial Protection Bureau plans to roll out regulations it says will protect the cash-poor from the debt snare. Liz Ryan Murray, policy director at National People's Action, community organizers known for aggressively pursuing an "economic and racial justice agenda," spoke with us about the industry and possible regulations.
Q: Are the federal regulations for the short-term loan industry under debate necessary?
A: There is a desperate need for a major, systemic overhaul of the payday, car title and installment loan industries. Right now, the foundation of their business model is to trap borrowers in debt and bleed them of income over the long haul. The CFPB has found that 80 percent of payday loans are rolled over, with borrowers having to take out another loan just to pay off the first, and so on. It's an industry that preys on people when they're most desperate, stripping billions of dollars per year from families' pockets and leaving communities in shambles.
Q: What kind of regulations would you want to see?
A: Advocates around the country have been calling upon the CFPB to enact an effective rule that is both strong in measure and broad in scope. First, it must cover the entire industry and not allow for easy evasion. Second, it must require that each and every loan be underwritten with a real calculation of a borrower's expenses and income. Third, it should include limits on the number of loans or duration of time for repayment to prevent families from becoming trapped in debt indefinitely. Finally, the CFPB must prevent lenders from reaching into people's accounts and extracting their funds. Although the CFPB cannot legally impose an interest rate cap, Congress can and should.
Q: Would these regulations go far enough?
A: Something must absolutely be done to protect borrowers from this predatory industry, and by issuing rules, the CFPB can do a lot to stamp out the worst abuses. Unfortunately, the industry has made sure that Congress prohibited the CFPB from imposing an interest rate or usury cap, which is the most effective way to ensure fair lending. Several states have imposed effective rate caps, and they have seen the best results — keeping money in families' pockets and driving out the worst predators. A federal rate cap to complement the new rules would be most ideal.
Q: How do payday lenders in Florida and elsewhere continue charging usury rates despite previous scrutiny?
A: Evasion tactics are as universal as neon signs for the payday loan sharks. One common loophole used in Florida and several other states in order to get around fee restrictions and repayment plan requirements was for payday lenders to license themselves as credit service organizations. Under the guise of helping people get out of debt, they put people much, much deeper in debt. In other states, when faced with restrictions on loans up to $500, predatory lenders started offering only loans for $501 and encouraging people to immediately pay back immediately what they didn't need — all the while charging triple-digit interest and rolling loans over and over. That's why it's so critical that the CFPB rule is broad enough to prevent the industry's escape act.
Q: Why must CFPB act?
A: The payday industry drains $10 billion per year in fees from families struggling to make ends meet. With interest and terms that would make a mafia boss blush, these predators aren't helping anyone build or save financially; they are just ruthlessly extracting money from those who can least afford it. It's the purpose and obligation of regulation to even the playing field and impose common sense restrictions to prevent people from being taken advantage of. A recent poll shows that Americans overwhelmingly agree, with nearly 80 percent of people supporting basic rules to ensure that loans can be paid back.
Q: Why wouldn't CFPB act to protect consumers?
A: The CFPB can and should protect consumers from predatory lenders. However, The payday lenders aren't going down without a fight. With billions of dollars in predatory fees on the line, payday lenders are trying to buy their way out of regulation by funneling millions in campaign contributions and lobbying dollars to Congress. In return, those legislators are looking for any and every excuse to destroy, defund or defang the CFPB.
But the public strongly approves of regulating predatory payday lending and supports the CFPB's mission to regulate the financial sector. If the CFPB stands up to predators with a strong rule, it can be sure of the public's continued support.
Q: Might regulations push the poor into worse financial products?
A: The government has a duty to protect consumers from abusive lending practices and ensure access to high-quality credit so that they can lead financially stable lives. The premise that we need to cling to deeply abusive practices and products is nothing more than a desperate attempt by the very few who are living a lavish lifestyle off the backs of the desperate to hold on to their racket. A recent poll shows that people are on to them, with strong majorities of Democrats, Independents and Republicans all united in their unfavorable views of the industry.
Q: When might the decision be announced?
A: We're expecting to see a 'first look' at the direction in which the CFPB is heading very soon. While we know the industry will put a lot of money into fighting any curbs on their predatory practices, families in Florida and across the country are ready to fight to support strong, broad, common sense reform.