A trap of payday loan fees has some consumers borrowing money again and again. Federal regulators want to stop lenders from making some payday loans and limit how often people can take out such loans.
After talking to both sides in the battle over payday lending rules, I cannot help but go back to my father’s regulatory regime. Two words dictated his approach to managing his finances: “Pay cash.”
No one, not even the Consumer Financial Protection Bureau, is ever going to roll out that simple a rule. It would never fly as a national mandate. But it sure could help you do the math when deciding if you need to stretch a few more months out of an old TV, a clunker of a car or not-so-great tires. Do you then reconsider how much you’d borrow for a longer-term loan? Re-evaluate whether you’d attend a private college or hold down costs by going to community college a year or two and then heading to a state university?
Yes, it’s old school. And cash only sounds way too simplistic, especially when people who took out payday loans say they felt so stressed out that they didn’t have other options. But as a child, I watched my father carry a wad of cash into a store when he bought new furniture and appliances. I also saw him repair a ton of things – including watching him patch a tire – to stretch his dollar.
And frankly, going cash only is one way many consumers dig out of credit-card fiascoes. If you don’t have the cash in hand or if you know you need cash for a big bill, you just don’t buy some things. Or you shop around until you find something cheaper.
The reality is no one should ever opt to borrow money from a loan shark, even if the shark is swimming under the cover of a trade association or financial institution. But upwards of 12 million people are estimated to take out payday loans in a year, loans for $300 or $500 that can have an annual percentage rate of 391%. Roughly 16,000 lenders run storefront outfits at shopping centers and the like, as well as online.
Perry Green, 30, said he ended up spending $1,000 in fees and interest after taking out a $300 payday loan at a storefront in Detroit. Green, who now lives in Chicago and spoke last week at a press conference headed by the activist group Michigan United, said his first loan turned into a three-year debt trap after he kept taking one loan out after another to cover bills and fees. He took out the loan to cover his rent because he thought it was his only option.
Dennis Shaul, the chief executive of the Community Financial Services Association of America, the trade group for payday lenders, strongly criticized the proposed restrictions on payday loans released last week by the Consumer Financial Protection Bureau. He claims it would put people out of business and cut off credit for the most vulnerable consumers who do not have many credit options.
Nothing is easier, he argues, than offering new consumer protections by saying most people can no longer get credit, which he claims is what the CFPB essentially is trying to do.
Of course, Shaul also argues that consumers ultimately could find riskier credit – if payday lenders are forced out of business by new federal rules – by turning even more frequently to illegal offshore lenders and other more dangerous sharks.
The CFPB proposal, along with earlier regulatory actions, would make it “challenging for banks to meet the needs of the estimated 50 million consumers who access a variety of bank and non-bank small-dollar lending products each year,” the ABA said in its statement.
While the CFPB has frequently expressed interest payday loans Parma no checking account in expanding the role for banks in the small-dollar loan market, the ABA said the proposal fails to do so in a meaningful way and will significantly limit the availability of small-dollar credit.
Some might have liked to see the CFPB simply clamp down on the triple-digit rates and sky-high fees charged by short-term, small-dollar lenders. But federal regulators do not have the authority to set interest rates. Individual states can decide if they want to limit fees and rates on payday loan and other small-dollar loan products.
Payday loans target those with no cash
“States can and should maintain strong rate caps and adopt new ones as the first line of defense against abusive lending,” said Tom Feltner, director of financial services for the Consumer Federation of America.
The Pew Charitable Trusts, which has conducted research on small-dollar loans, has an interactive online map outlining what states are doing in the payday loan regulation space.
Michigan, for example, sees 5% of the state’s population use payday loans. According to Pew’s research, Michigan is ranked as a permissive state, which means that the state has interest rates that allow payday loans to exist in the state. Pew notes that the annual percentage rate typically exceeds 300% for borrowers in Michigan.
“The CFPB’s real power to lower prices is to bring lower-cost providers, like banks and credit unions, into the market,” said Alex Horowitz, senior officer with the small-dollar loans project at Pew.
Pew researchers favored including a proposal to require that longer-term loan payments do not take up more than 5% of a borrower’s income. Pew said the 5% payment option, which was in the 2015 proposal from the CFPB, would provide the product safety standards that banks need to offer small-dollar loans at six times lower prices than payday lenders.
Given all the powerhouses with financial interests and opinions on small-dollar loans, we’re likely to hear more as the plan is open to public comment through Sept. 14. Consumer advocates, such as Michigan United, are urging consumers to voice their complaints about payday loans with the CFPB.
Yet, don’t bet on anyone mandating cash-only purchases – or for that matter, completing eliminating debt traps. It’s just not that simple. Or is it?
