The most recent "Last Week Tonight" dealt with "Buy Here, Pay Here" Car Loans that rip off the most poor and vulnerable consumers. These car loans, as well as payday loans, are disasters for consumers and need strong regulation against them to prevent predatory lending.
"Payday loans" are a Wall Street/financial industry scheme/scam that preys on people with low incomes. The Consumer Financial Protection Bureau (CFPB) is working on rules to reign this in and protected Americans. They want to hear from you. Please join the fight by clicking here to send a comment to the CFPB in support of a strong rule.
Loans Used To Be Safe And Boring
The financial industry and the loans they made used to be regular and boring – all about evaluating risk. They would look at a borrower's financial situation and at the proposed use of the borrowed funds and decide how risky a loan might be, and "price the loan" (come up with an interest rate) accordingly. If the risk was just too high they wouldn't make the loan at all.
Another thing that "used to be" was the old saying that you couldn't get a loan unless you didn't need the money. This actually made sense because getting a loan was supposed to be for a purchase that might be larger than you can handle all at once but that enabled you to increase your ability to pay back the loan. Buying a car meant you could get to work. Buying a house meant you could stop paying rent. A college loan meant you could get a higher-paying job. Expanding a business meant making more money that can be used to pay off the loan. You weren't supposed to be able to "get in over your head."
A loan certainly was never about getting money just to get by for another few weeks. (You used to have to go to the mafia for that, and everyone knew you could get your legs broken if you did.) Usury laws made sure people couldn't legally get in over their heads by limiting the interest rate that could be charged so if a borrower was high-risk the lender couldn't legally "price the loan" accordingly by charging a high enough interest rate to make it worthwhile.
Then Came Financial Deregulation
With financial deregulation a different, much less boring kind of loan industry sprang up: payday lending. Instead of evaluating risk in order to block loans to people who couldn't pay the loan back, the payday loan industry tries to find poor, desperate people, dangles loans in front of them, and then traps them into a cycle that drains them of everything.
The "debt trap" is the actual business model, and they say so.
One payday loan CEO said of their “customers”: “The theory in the business is [that] you’ve got to get that customer in, work to turn him into a repetitive customer, long-term customer, because that’s really where the profitability is.”
Another payday lender even put out a training manual for new employees, saying to employees that their job is to push borrowers from one payday loan to the next.
The chairman of the payday lender‐supported Consumer Credit Research Foundation and president of the Payday Loan Bar Association wrote an email saying, “In practice, consumers mostly either roll over or default; very few actually repay their loans in cash on the due date.”
Payday lenders can find lots of desperate people in today's low-wage America. A survey from Bankrate.com showed that as many as 63 percent of Americans would be strapped to raise $500 if they needed it in a crisis.
There are plenty of people who are "unbanked" (do not have a bank account) or "underbanked" (can’t otherwise get a loan). So they look for another way to get a loan in an emergency or cash a paycheck. According to the 2013 FDIC National Survey of Unbanked and Underbanked Households, "7.7 percent (one in 13) of households in the United States were unbanked in 2013. This proportion represented nearly 9.6 million households." On top of that, "20.0 percent of U.S. households (24.8 million) were underbanked in 2013, meaning that they had a bank account but also used alternative financial services (AFS) outside of the banking system."
More Facts And Figures
This year the National Council of LaRaza and The Center for Responsible Lending looked at the situation just in Florida and released a report titled, “Perfect Storm: Payday Lenders Harm Florida Consumers Despite State Law.” According to the report,
● Interest rates average 278 percent.
● In Florida there are more payday loan stores than Starbucks (more than 1,100 outlets vs, 642 Starbucks).
● Payday lenders “stripped” Floridians of over $2.5 billion in fees between 2005 and 2016.
● “Last year, over 83 percent of Florida payday loans were to Floridians stuck in 7 or more loans.”
● “The average borrower takes out more than 8 loans per year.”
● “The economic drain of payday lending is disproportionately concentrated in Florida’s black and Latino communities, and has seen significant growth among senior citizens.”
That was Florida. Here are some national facts from Americans for Payday Lending Reform (a project of People’s Action):
● Thirty-five states allow payday lending with an average of 300 percent APR or more on a two-week loan. [Philadelphia Inquirer, 6/23/13]
● CFPB: 80 percent of payday loans are rolled over into new loans within 14 days. [Yahoo Finance, 8/13/14]
● CFPB: 20 percent of new payday loans cost the borrowers more than the amount borrowed. [Yahoo Finance, 8/13/14]
● An average payday loan claims a third of a borrower’s next paycheck. [Cleveland Plain Dealer, 6/13/14]
● CFPB: half of all borrowers took out at least 10 sequential loans. [Cleveland Plain Dealer, 6/13/14]
● CFPB: 60 percent of payday loans are renewed seven or more times in a row, typically adding a 15 percent fee for every renewal. [Times Picayune, 5/8/14]
● CRL: the average payday loan customer spends two-thirds of the year in hock to the payday lender. [St. Louis Post Dispatch, 6/18/14]
● 22 percent of monthly borrowers, “largely people whose income is from social security”, remained in debt for an entire year. [Cleveland Plain Dealer, 3/26/14]
● Only 15 percent of borrowers were able to repay their initial loans without borrowing again within two weeks. [Cleveland Plain Dealer, 3/26/14]
● CFPB: Three quarters of loan fees came from borrowers who had more than 10 payday loans in a 12-month period. [Cincinnati Enquirer, 8/11/13]
Payday lending is a huge problem. A huge industry has grown with a business model of trapping low-wage people in a debt trap and draining everything they can from them. Yes, low-income workers need some place to turn in a financial crisis. But setting financial predators loose on them is not the way.
Doing Something About It
In various parts of the country, activists are taking the fight directly to the payday lenders, as shown in this video:
On August 1, one-hundred activists from twenty-five states took action on Speedy Loan, a payday lender in Milwaukee, to call on Speedy Loan Corp. owner and president Kevin Dabney to stop trapping families in 500 percent interest debt-trap loans. Monday’s action came midway through the 90-day public comment period on a proposal to issue the first-ever national rules by the Consumer Financial Protection Bureau (CFPB) to regulate the payday and car title lending industry.
Join the fight! Go to StopPaydayPredators.org and make a comment to the CFPB.
The CFPB is proposing new rules to crack down and protect Americans from these scammers. The bureau has opened up a public comment period.
To dismantle the debt trap, payday lenders should only loan to borrowers who can afford to repay their debt.
You can make a comment to the CFPB in support of a strong rule. From the website:
We can rein in the worst payday lending abuses with a proposed rule from the Consumer Financial Protection Bureau. Payday lenders are fighting to keep their unfair and abusive practices going. It’s up to us to make sure the CFPB hears loud and clear that we need to stop the debt trap once and for all.
A single unaffordable payday loan is one loan too many. The proposed rule gives a “free pass” to payday lenders to make six bad loans, allowing lenders to sink people into a dangerous debt trap before the rule kicks in. The CFPB was right to base their proposal on the standard that borrowers should be able to repay their loan, but that standard must be on every loan, from the first loan. The CFPB should also enact protections to prevent lenders from stringing people along by ensuring a 60 day break between loans and limiting ‘short term’ loans to 90 total days of indebtedness per year.
The payday lending industry is spending millions on a disinformation campaign that includes flooding the CFPB with comments from customers coached to write industry-friendly statements. We need to push back against the industry. Please leave a comment now for the CFPB in support of a strong rule.