The Consumer Finance Protection Bureau (CFPB) has proposed new rules aimed at reining in widespread abuses in the payday lending industry. If effective, these rules will bring much needed oversight to predatory lending practices targeted at the most vulnerable Americans.
Despite payday lenders’ claims that they offer quick cash to help borrowers cope with emergency expenses and get through to their next paycheck, payday loans are often deliberately structured to trap low-income borrowers in long-term debt at exorbitant interest rates. The true cost of loans is often hidden from borrowers, and payday lenders frequently manipulate borrowers into taking out new loans to cover the costs of earlier loans, snaring them in a debt trap. By taking advantage of borrowers’ desperation to extract repayments that are much larger than what was originally owed, the payday lending industry leaves families and communities far worse off than they were before. Each year, the payday lending industry drains billions of dollars from low-income borrowers and communities (the median income of borrowers is about $25,000), leaving families unable to pay for basic needs, and, in some cases, pushing them into bankruptcy.
Lenders’ irresponsible, deceptive, and exploitative practices have gone unregulated for far too long.
- Because payment requirements routinely exceed borrowers’ ability to repay, 4 out of every 5 payday loans are rolled over or renewed, according to the CFPB.
- A majority of all payday loans are made to borrowers who renew their loans so many times that they end up paying more in transactional fees than the amount of money they originally borrowed.
- Payday loans with exorbitantly high interest rates, 300% is the norm, are usually offered to low-income borrowers on the condition that the lender can take repayment directly from the borrower’s bank account. When borrowers’ debt exceeds their ability to pay, they incur bank penalties and can even lose their bank accounts as lenders repeatedly seek to withdraw funds that do not exist.
The CFPB has the power to stop the debt trap by prohibiting abusive and deceptive lending practices. Key features of an effective rule would include requiring payday lenders to assess whether borrowers can repay loans based on their income and expenses. This “ability to pay” analysis is standard practice in the mainstream banking industry and would significantly curb predatory lending in this area. The CFPB’s rules should also help protect borrowers from being buried under multiple loans, and from being held under those loans for extended periods of time.
The Shriver Center applauds the CFPB for taking action on this critical issue. Earlier this year, the Shriver Center, in coordination with other members of the Legal Impact Network (LIN) — a broad group of state-based, anti-poverty experts and advocates — sent a letter to the CFPB, urging the agency to set strong standards on payday lending. Our partners have firsthand knowledge of how payday lending endangers low-income individuals and families and have fought hard to protect them.
We will work with our partners to advocate for the most robust set of protections from abusive lending practices possible. While pushing CFPB to create the most effective national rules, we will also urge that its rulemaking does not undermine accomplishments in states that have banned this egregious form of predatory lending.
The Sargent Shriver National Center on Poverty Law provides national leadership in advancing laws and policies that secure justice to improve the lives and opportunities of people living in poverty. We specialize in practical solutions. We advocate for and serve clients directly, while also building the capacity of the nation’s legal aid providers to advance justice and opportunity for their clients. www.povertylaw.orgDownload this