By Mike Calhoun
February 21, 2019 at 5:00 am ET
Mary Schmidt, a lifelong resident of the St. Louis region, had a good job with a school district. In an attempt to cover a financial shortfall, she took out a payday loan of a few hundred dollars.
Unable to afford to repay the loan principal and fee, she repeatedly reborrowed — more than a dozen loans in total. Each time, she was hit with a fee. She was “drowning” in fees far in excess of the original loan amount.
The payday lender caught Mary in its debt trap. She couldn’t make her car payment, student loans or mortgage. She was short on money for food and got behind on utilities. Mary’s credit score was destroyed, and her dream of opening her own business was “off the table.” Instead of helping her out of a hole, payday loans only pushed Mary further down.
Her story is all too common. Research has shown that taking out a payday loan makes a person more likely to experience a range of harmful effects, including delaying medical care, losing a bank account and filing for bankruptcy.
In 2017, the Consumer Financial Protection Bureau — a federal agency tasked with serving as our watchdog — issued a rule to help prevent payday companies from pushing Americans into this financial quicksand. However, a new Trump-appointed CFPB director, Kathy Kraninger, has just moved to gut the agency’s payday rule and keep Americans exposed to this economic devastation. A crucial consumer protection, which was developed through more than five and a half years of extensive research, analysis and public outreach, is on the verge of being recklessly ripped up.
Payday lenders’ current business model is based on trapping consumers in debt — and they have an egregious track record of targeting military servicemembers, African-Americans and Latinos.
Payday lenders require borrowers to give them direct access to their bank accounts, so — as seen in Mary’s experience — they can snatch their payment from a borrower’s paycheck before it goes to food, rent or other essentials of life. This level of control over someone’s life is terrifying.
Furthermore, these companies charge jaw-dropping interest rates, on average more than 300 percent APR. Payday borrowers, who are almost all low income and already financially strained, usually can’t afford to repay the loan and are forced into a cycle of reborrowing, which generates hefty fees for the lender.
Payday lenders earn about 75 percent of their revenue from borrowers who take out more than 10 loans in a year. This makes their most-profitable customers the ones who cannot afford to repay the original loan on time, who instead get caught in being flipped into one expensive loan after another.
The CFPB’s researchers found that “More than four out of every five payday loans are re-borrowed within a month, usually right when the loan is due or shortly thereafter.” The agency also discovered that industry leader ACE Cash Express’ employee training manual featured a graphic — with five arrows forming a circle — that made obvious the prevailing cycle-of-debt business model.
The CFPB’s 2017 payday rule addresses this problem “by requiring lenders to determine upfront whether people can afford to repay their loans.” The company would have to consider borrowers’ current expenses and income in making this determination.
Republican, independent and Democratic voters alike overwhelmingly support this commonsense “ability-to-repay” standard. The broad coalition of organizations that initially called for and now supports the rule includes veterans, seniors, and faith groups.
Despite the rule’s immense popularity, President Donald Trump’s handpicked heads of the CFPB have chosen to side with the payday loan sharks. The agency, under Trump-installed leadership, even joined with the payday industry in a lawsuit to indefinitely delay the rule’s implementation date (which was set for Aug.19 of this year).
Just a few days ago, Kraninger released a plan that would eviscerate this consumer protection by removing the ability-to-repay standard. If this plan goes through, Kraninger would bear direct responsibility for keeping people under the thumb of payday lenders.
Americans, of all backgrounds, have called for freedom from this subjugation. We urge Kraninger to listen.
Mike Calhoun is president of the Center for Responsible Lending, a nonprofit, nonpartisan organization dedicated toward a fair, inclusive financial marketplace, and he often testifies before Congress and has served as chair of the Federal Reserve Consumer Advisory Committee.
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