Payday lenders still getting favorable terms
By DAVID LAZARUS | Los Angeles Times | Published: August 16, 2019
Something very important, affecting millions of consumers, won’t happen Monday.
That’s when new protections from abusive payday and car-title lenders were set to take effect, requiring the firms to make sure borrowers can pay back their obligations in a reasonable amount of time and don’t become mired in debt.
However, the Trump administration is delaying this perfectly reasonable safeguard for another 15 months, and already has declared its intention to do away with the rules entirely amid concern they’re too troublesome for lenders.
This is the latest example of President Donald Trump undermining or eliminating consumer-friendly policies initiated by his predecessor, Barack Obama, for no better reason than because industry players demanded a lighter touch.
“Despite years of evidence about the harms of payday and car-title loans, the new leadership at the Consumer Financial Protection Bureau has decided to favor the lenders,” said Lauren Saunders, associate director of the National Consumer Law Center.
“They don’t care that these loans result in people getting caught in debt traps that can last for months and months,” she told me.
The CFPB passed the new rules in 2017 and gave the $50-billion short-term loan industry nearly two years to prepare for the changes.
“Too often, borrowers who need quick cash end up trapped in loans they can’t afford,” former bureau Director Richard Cordray, an Obama appointee, said at the time. “The rules’ common sense ability-to-repay protections prevent lenders from succeeding by setting up borrowers to fail.”
Let’s say you borrow $400. You’d be obligated to repay the loan within two weeks, plus $60 in interest and fees — the equivalent of an annual percentage rate of more than 300%.
If the loan can’t be repaid — and all too often it can’t for people living paycheck to paycheck — your obligation would get rolled over into a new loan, resulting in an ongoing burden of high-interest debt.
In a 2014 report, the CFPB found that over 80% of payday loans ended up being rolled over into new loans or followed within days by a new loan. Half of all payday loans resulted in 10 additional loans to pay off the original debt.
Car-title loans can be even more troublesome. Like payday loans, they’re a way to get fast cash when needed. Unlike payday loans, you’re putting up your vehicle as collateral. Not only do title loans come with exorbitant interest rates, but if you fall behind on payments, you can lose your car.
Rebecca Borné, senior policy counsel with the Center for Responsible Lending, said about 20% of car-title loan recipients end up having their vehicles taken and sold off by lenders.
“It’s just shocking,” she said. “These loans have a truly crushing impact on so many families.”
Things were supposed to improve as of Monday. Under the new rules, lenders would have to conduct a “full-payment test” — meaning they’d have to determine up front that a borrower has the financial means to repay the loan without taking out another loan. Moreover, if a borrower takes out three payday loans in “quick succession,” lenders would have to cut them off for 30 days. Lenders also would be prohibited from placing borrowers in debt for more than 90 days in any 12-month period.
“Requiring affordable loans that a borrower can pay back without taking out another loan would have protected millions of people who are typically caught by lenders in high-cost debt traps,” said Christine Hines, legislative director for the National Association of Consumer Advocates.
“The new CFPB leadership does not want to give the rules a chance to work,” she said.
The short-term loan industry went into Chicken Little mode as soon as the new rules were announced a few years ago, arguing that the requirements would put thousands of lenders out of business.
That means, of course, the industry was acknowledging its business model depends on ensnaring consumers in endless debt. In a normal world, that would be sufficient justification to proceed with the new protections.
But we are not in a normal world. To Trump, the industry’s complaints were a sure sign of government overreach. His newly business-friendly CFPB announced earlier this year that requiring short-term lenders to perform due diligence on borrowers “would impose substantial burdens on industry” and make it harder for people to access credit.
To be sure, it’s important that people have access to emergency funds in a pinch. Banks, credit unions, government agencies — each can play a role in addressing such needs.
Payday and car-title loans are not that financial safety net. They’re black holes that can pull in the desperate or unwary, then bleed them of all available resources.
The Community Financial Services Association of America, a trade group representing short-term lenders, told me in a statement that it’s pleased to see a halt to the CFPB’s “flawed” and “misguided” regulation.
“The bureau’s rule ... was crafted on a pre-determined, partisan agenda,” it said, adding that the CFPB “failed to demonstrate consumer harm from small-dollar loans, ignored unbiased research and data, and relied on flawed information to support its rulemaking.”
Which is true, if you disregard those pesky facts about people being stuck for months or even years paying back a loan, or losing their car because the interest rates were so high.
Several years ago, Congress had to pass a law capping interest rates on loans charged to members of the military. It makes you wonder why civilians should be treated differently.
It also makes you wonder why short-term lenders currently enjoy so much influence in Washington.
In 2016, the year Trump was elected president, payday lenders contributed $2.8 million to political causes, according to the Center for Responsive Politics. Of that total, 81% went to Republicans.
In the 2018 election cycle, payday lenders contributed $2.5 million. Eighty-nine percent went to Republicans.
Last year, the payday lending industry for the first time held its annual convention at the Trump National Doral Miami resort.
Payday lenders returned to the Trump-owned hotel for this year’s event. There was much to celebrate.
David Lazarus is a Los Angeles Times business and consumer columnist.