Anybody who has been reading this Report over the past several years should already know that I am not a fan of the payday lenders. If there has ever been any doubt, let me resolve it by saying that I am not. I consider this industry to be one that preys on and takes advantage of folks on a regular basis. Few people know how politically active and powerful this industry is both at the federal and state levels. Payday lending is now a $7 billion a year industry in the United States. Millions of Americans with limited income see this as their only way to get quick cash to pay for an unexpected expense. The market is so lucrative that some traditional banks now offer their version of the payday loan, called a deposit advance.
While some states limit the interest rate payday lenders can charge, a few states actually ban these loans. While payday lenders have to comply with federal law, there has been little federal oversight in the past. Hopefully, that’s about to change. The Consumer Financial Protection Bureau held a hearing in Birmingham, Ala., last month on payday lenders. Richard Cordray, the CFPB’s newly-appointed executive director, said his agency will examine both bank and nonbank institutions offering these short-term, small-dollar loans. Cordray had this to say:
We recognize that there is a need and a demand in the country for emergency credit. At the same time, it’s important that these products actually help consumers and not harm them. We know that some payday lenders are engaged in practices that present immediate risks to consumers and are illegal. Where we find these practices, we will take immediate steps to eliminate them.
Payday loans are supposed to be short term: 14 days. As the name implies, they are supposed to get a person to the next pay day, when they will be able to repay the loan. Here is how a payday loan works. Let’s say a person needs $100 and the interest rate for that two week period is 17%. He or she writes a postdated check made out to the lender for $117. If they can’t pay that amount when the two weeks is up, the borrower keeps $17, the loan is extended and another $17 fee is added on. It’s quite common for the borrower to be unable to pay the loan when due.
The borrowers often roll-over their debt when they can’t repay it. They wind up living off that borrowed money at an annual interest rate of 400% to 600% or more. Steven Stetson, a policy analyst with Alabama Arise, an anti-poverty group based in Montgomery, said at the hearing that folks get “churned through the system” six, eight, ten times a year. He said that “If we have laws against gouging for gas and water, we ought to have laws against gouging for loans.” He is absolutely correct.
Director Cordray said at the meeting that the CFPB will look into the long-term use of payday loans. He talked about a consumer who had contacted the agency and who had taken out a $500 loan to pay for a car repair. But at the end of two weeks, the man couldn’t repay the loan. It’s been nine months and the borrower has paid $900 on that loan and still has $312 more to go. The money is withdrawn directly from his paycheck and now the man doesn’t have enough left to pay his bills. I suspect that’s a story that could be told in every state where payday lenders operate.
Folks who use payday loans tend to have less income, fewer assets and lower net worth than the average American family. Reportedly, they are disproportionately people of color. The industry insists it is serving people who are denied credit and shut out of the traditional banking system. They obviously like the current system. There have been tremendous abuses in that system and there are some badly needed changes. Hopefully, Director Cordray and the new agency will bring them about.
Source: Associated Press
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