Call it a start. The consumer Financial Protection Bureau, created as a response to the Great Recession, this week took action against one of the country’s most predatory enterprises, the usurious “payday loan” business.
The industry has been justly vilified across the nation’s political and social spectrum for further impoverishing financially stressed Americans. It needs at least to be reined in and restructured. The Obama administration responded, but to be most effective, the problem requires attention from Congress.
The industry cynically pitches itself as salvation to the population it abuses. These are meant to be short-term loans, but with exorbitant fees. A customer who borrows $500 would generally be expected to repay it within two weeks and at an additional cost of $75, equal to an annual interest rate of 391 percent.
But the clients of these shady operations are poor to begin with and often cannot make the repayment. They borrow more and before long can owe more in interest than the original loan amount. Some of them are even encouraged to borrow more as the solution to their problem.
Quoted in a recent New York Times story was Candice Byrd, a former payday borrower, who took out a $500 loan in Bloomington, Ill. Halfway through the loan’s six-week duration, the lender actually recommended that she roll it over into a new loan. “She was like, ‘You’re a good customer. This would be helpful for you,’ ” Byrd recalled. “It was the worst idea ever.”
She borrowed repeatedly to cover the costs and the ever-rising debt. She was unable to pay other bills and lost both her car and her apartment. She ultimately defaulted on the final two loans, wrecking her credit rating. “These places want you to keep borrowing,” she said. “They don’t want you to climb out of the hole.”
In response, the Consumer Financial Protection Bureau plans to issue regulations that will in many cases require lenders to verify their customers’ income and confirm they can afford to repay the loan. The number of rollover loans would also be limited. That would attack the industry on its underbelly, said Richard Cordray, the agency’s director.
“The very economics of the payday lending business model depend on a substantial percentage of borrowers being unable to repay the loan and borrowing again and again at high interest rates,” he said. He offered a striking analogy: “It is much like getting into a taxi just to ride across town and finding yourself stuck in a ruinously expensive cross-country journey.”
These rules, alone, could force many of these lenders to close their doors, but that is only marginally different from putting any loan shark out of business. Predatory lending is illegal for most banks and is a moral and ethical offense, whoever conducts it.
States offer a mishmash of laws on payday loans, though, interestingly, those that ban it cut across the ideological spectrum. New York and Georgia both outlaw the practice, with the latter classifying it under racketeering laws. But 32 states allow it, though even there, opposition is broad. In Texas, for example, the Baptist Christian Life Commission has lobbied for laws to outlaw the practice.
This is a proper place for Congress to act. It already exerts authority over banks. It would be a strange argument that it cannot also regulate storefronts whose mission is to prey on the poor. All that is necessary is for Congress to care.
None of this is to say there can be no room for short-term loans that serve the poor. In such cases, interest rates would be higher because the risk is higher. The industry needs at least to be overhauled and regulated to offer protection to vulnerable borrowers who, if the lenders have their way, will dig themselves so far in debt they might never get out.