Congress must protect working families from payday predators

The classical economic argument that consumers as self-determined agents reap benefits from markets that are free of regulatory constraints does not hold in the payday loan market. Payday lenders, charging 260 percent interest or more, distort the consumer lending market by using deceptive marketing ploys to offer “quick and simple” solutions to short-term cash crunches. But these “quick and simple” loans quickly become long-term debt traps. Payday predators drain $8 billion a year from families and our economy.

A new rule from the Consumer Financial Protection Bureau (CFPB) aims to protect consumers from some of the more abusive and exploitative features of payday loans. But some in Congress have their sights set on repealing this commonsense rule. Families facing low wages or uneven work who can’t meet their expenses understandably are focused on the immediacy of today’s problems, not the long-term consequences of incurring high-priced debt.

{mosads}Many payday loan customers fall into a cycle of reborrowing and extending payments that lasts far beyond the original term of the loan. A CFPB study found that 80 percent of payday borrowers either roll over their loans or reborrow within 14 days of repayment. The payday industry’s business model depends on borrowers rolling over 10 or more loans a year, incurring huge interest charges with each “new” loan.

That’s why the CFPB’s rule is so important because it will break this debt trap. The rule gives lenders a choice to either ensure that borrowers can afford to repay their loans or observe guardrails that limit the level of consumer indebtedness. Responsible lenders don’t need to be told to assess the ability of borrowers to repay, but payday lenders do. Under the rule, if payday lenders who make short-term loans want to issue more than six loans a year to a borrower or trap them in debt for more than 90 days, they’ll need to review income and expenses to ensure the person is able to repay the loan. These common sense requirements will limit the cycle of over-indebtedness.

Experience shows that when bad loans are curtailed, payday borrowers adopt better methods to address their family’s budget shortfalls and find more responsible credit options. The CFPB worked to preserve these better loans. The rule contains exemptions for accommodation loans by banks and others so that they can play a role in meeting the needs of small-dollar borrowers. Credit unions, whose national association was “very pleased” with the CFPB rule, can also step up, as they often have, to offer low-cost alternatives to debt trap loans.

Similarly, there are better options than debt trap loans when a family is faced with a big winter heating bill. For example, many states require utility companies to offer payment plans that consider the customer’s ability to pay. Polling shows 73 percent of Americans support a rule to rein in predatory payday lending. Banks and credit unions appear content that the rule will not hinder their ability to make responsible small-dollar loans with reasonable terms and rates. Payday lenders and, unfortunately, some members of Congress, appear to the only ones opposed to the rule.

Resolutions have been filed in the House and Senate to overturn the CFPB rule under an obscure fast-track procedure. Not surprisingly, the sponsors of the House resolution have taken $471,725 from the payday loan industry, and the Senate sponsor has received $35,800. Our representatives in Washington and acting CFPB director Mick Mulvaney must reject the push from lenders preying on vulnerable families to overturn modest protections against these harmful debt trap loans.

Lois R. Lupica is the Maine Law Foundation professor at the University of Maine School of Law, where she focuses on consumer credit policy.