Editorial: Finally, a crackdown on predatory payday lending

The Consumer Financial Protection Bureau new rules for payday loans and car title loans have drawn predictable outcry from lenders, especially small storefront operators who say the restrictions will put them out of business. And it’s an understandable complaint – after spending five years studying the high-cost credit market, the bureau has shot to the heart of these lenders’ business model.

But outrage here is not what regulators do. This is how these lenders have taken advantage of their clients’ financial difficulties. As the bureau’s research shows, payday lenders depend on consumers who can’t afford the loans they take out. With no other way to repay their original loans than to get more, most of these clients end up paying more in fees than they originally borrowed.

That’s the definition of predatory lending, and the bureau’s rules target precisely that problem. They don’t prohibit lenders from offering the kind of financial lifeline they claim to provide – one-time help for cash-strapped and credit-troubled people facing unexpected expenses, such as a large bill. for medical care or car repairs. Instead, they prevent lenders from racking up fees by issuing multiple loans in quick succession to people who couldn’t really afford them in the first place.

Payday lenders depend on consumers who cannot afford the loans they take out.

The question now is whether lawmakers will try to reverse the office and keep a financial pipeline popular with millions of low-income Americans precisely because it’s the one most easily accessible to them, whether online or from storefront lenders clustered in urban areas. It’s also a huge pipeline — the industry provided $6.7 billion in loans to 2.5 million American households in 2015, the bureau estimated.

Advocates of these expensive loans say they are the only option available to people who live paycheck to paycheck. The problem is that the typical borrower can’t handle the terms of a payday loan, which require the full amount to be repaid in about two weeks, plus fees.

What these borrowers really need is a traditional installment loan that they can repay over time. This option is emerging in states that ban payday loans or encourage small dollar lending to borrowers with questionable credit, such as California.

The bureau found that 90% of fees collected by payday lenders in a year come from customers who borrowed seven or more times, and 75% come from those who took out 10 or more loans. These people are not helped out of an impasse; they are trapped in debt.

The bureau’s rules are expected to reduce the number of payday loans and auto titles issued, which critics say is an attack on low-income Americans’ access to credit. A more accurate description is that the rules are an attack on unaffordable credit.

Starting at 21 months, the rules will require payday lenders and auto lenders (which offer short-term loans that use the borrower’s car or truck as collateral) to do the kinds of things that banks and credit unions already do: before granting a loan, they will have to determine if the borrower can repay it. These lenders have not bothered with this type of underwriting because it is expensive, instead relying on high fees (usually $15 per $100 borrowed, or the equivalent of an interest rate of at least 300% per year) to cover the high default rate. . The office found that in 2011-2012 almost half of the money lent by payday outlets went uncollected, hence the need to generate windfall revenue from fees.

The new rules will allow payday lenders (but not those providing auto title loans) to skip the determination of repayment capacity if, and only if, they limit the loan to $500 or the maximum permitted by law. state law, whichever is lower. To discourage these borrowers from taking loans they cannot easily repay, the rule limits them to two more loans of decreasing size over the next 90 days. If they haven’t repaid their debt within 90 days, they will have to wait at least a month before getting a new loan.

Some consumer advocates argue that there should be no exceptions and that the rule is not strict enough to prevent payday lenders from plunging borrowers into deeper financial hardship. But the bureau is right to let these companies try to build a lending business that doesn’t rely on charging multiple fees for what amounts to a single loan.

Payday loan and auto-title companies said they will fight the rule in court, and their allies in Congress are expected to soon try to pass a resolution rejecting it. Lawmakers shouldn’t be fooled by the industry argument that payday loans and auto title loans are a crucial source of credit for low-income Americans. As low-income consumer advocates have argued with regulators for years, the problem here is not access to credit. It is a protection against predatory loans.

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About Judith J. George

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