By David Rothstein & Doug Farry
June 9, 2016 at 5:00 am ET
Earlier this month, the Consumer Financial Protection Bureau (CFPB) announced new rules to reform payday lending and auto title loans. These rules are a welcome development for an industry that for far too long has recklessly taken advantage of working families, trapping them in endless cycles of debt that few have been able to overcome. They also pave the way to expand options for consumers and ensure they are able to secure a safe, affordable loan that doesn’t break the bank in the process.
For years, there were few places for low-income individuals and families to go when they needed immediate access to cash for emergencies. The Federal Reserve recently found that half of U.S. households would have trouble paying for emergency expenses of $400. With few options these borrowers go to payday lenders, who have nearly monopolized the market. Payday lenders lure in potential customers with the promise of reasonable interest rates, only to lock borrowers in to a cycle of repeated borrowing to pay for previous loans. In many cases,
Often, the interest outweighs the original borrowing amount. In Kansas City, a man ended up paying $50,000 in interest on a $2,500 payday loan. In Boise, a veteran living off Social Security benefits took out a $400 loan for car repairs and wasn’t able to meet the 2-week deadline to repay the loan, forcing him to eventually borrow $3,000 and owe four times that amount.
Payday loans have been particularly harmful to the men and women of our armed services, like those stationed at Camp Pendleton, with payday debt that threatens their ability to serve. That is why the CFPB’s new rules are so important. Over the coming months, the Bureau will require lenders to ensure borrowers can pay back a loan before issuing it, and limit the number of refinancing opportunities to avoid customers taking out new loans to cover existing ones. In addition, lenders will be required to provide more transparency to customers when they need to access a borrower’s bank account for a scheduled repayment.
Collectively, these steps will improve the small dollar loan market. But simply reforming a broken system is not enough. Consumers benefit when they have more choices available – but borrowers have not enjoyed those alternatives. That is why we formed the Coalition for Safe Loan Alternatives, a collection of community organizations, local banks, advocacy groups, and credit unions committed to developing innovative products to compete with payday loans. Our members disagree with the powerful special interests in the industry who say it isn’t feasible to provide short-term loans at reasonable interest rates. Instead, we favor a sensible payment plan that helps families build credit.
Take Employee Loan Solutions, a San Diego-based company and a member of the Coalition for Safe Loan Alternatives. Employee Loan Solutions, through its TrueConnect program, has developed short-term loan employee benefit initiative with an interest rate lower than comparable payday loans. TrueConnect is offered at no cost to employers, and allows the company’s employees access a small bank loan to cover unexpected expenses, with repayment of principle and interest through small payroll deductions over a full year.
This ensures borrowers know in advance exactly how much they owe and how long it will take for them to pay it off. The loan repayments through payroll deduction are reported to credit agencies to help build the customer’s credit and create a foundation for their long-term finances.
Educating potential borrowers about alternatives like TrueConnect is critical to ensuring they can compare options and make the best decision for their need. Increased competition, combined with the CFPB’s rules, will keep the payday loan industry fair and transparent. As these rules are implemented, we will continue to find new products and promote existing ones, like TrueConnect, to ensure that credit is affordable and available to everyone.
David Rothstein is the Chair of the Coalition for Safe Loan Alternatives. Doug Farry is the Executive Vice President of Employee Loan Solutions and a co-founder of TrueConnect.