Momentum is building to curb predatory lending
As the nation and much of the world continue to suffer from the ripple effects of COVID-19, the ability of consumers to stay up to date on bills and spending is steadily declining – if not already.
According to the Census Bureau Household Pulse Survey conducted in early February, more than a third (34.9%) of adults live in households where it was quite or very difficult to pay usual household expenses during the period. coronavirus pandemic; 30% think an eviction or seizure is likely within the next two months.
For low- and middle-income families, these are the types of financial pressures that can make them vulnerable to predatory and expensive loans. The irony is that while consumers who use these products typically need a small amount of money, the fees that accompany these loans are actually a debt trap that worsens, not improves, family finances. .
Access to this “quick cash” is linked to direct access to the borrower’s bank accounts or the likelihood of repossessing a car from a car title loan. In addition to owing more money for the fees than for the loan itself, borrowers also experience other financial harms, including delinquencies on other bills, overdraft fees, unintentional loss of bank accounts, and bankruptcy.
To date, 17 states and the District of Columbia have passed rate cap legislation, limiting interest charged to 36% or less. But there are encouraging signs that the number of protected consumers may soon increase.
For example, last January, Illinois’ Predatory Loan Prevention Act won bipartisan legislative passage in both houses in January. Led by the state’s black legislative caucus and aided by the support of a broad coalition including clergy, industry and government officials, the bill will cap interest rates on loans to the consumption at 36% and will affect high cost payday loans, car title and installment loans.
Currently, Illinois borrowers pay payday and title loan fees of over half a billion dollars annually. Almost half of the state’s payday borrowers earn less than $ 30,000 a year. In Chicago, the state’s largest city and home to millions of consumers of color, who make up 47% of the city’s population, communities of color zip codes account for 72% of Windy City payday loans.
According to the Woodstock Institute, a nonprofit consumer advocacy organization in Illinois, a resident of Chicago’s Austin neighborhood, where the median income for residents is $ 35,855 and is home to mostly consumers of color, is 13 times more likely to have a payday loan than that of a Lincoln Park resident, where median incomes exceed $ 200,000, more than double that of the city as a whole, at $ 61,811, and house prices are reaching frequently seven digits.
If signed by the state governor, the bill will end what Woodstock calculates is an average annual rate (APR) of 297% on payday loans as well as the average APR of 179% on payday loans. auto title loans.
Additional signs of hope can be found in several state capitals. A bill to cap loan rates at 36% APR has progressed in New Mexico, and bills have been introduced in Minnesota and Rhode Island.
“The current economic crisis has added crushing debt on the backs of Americans who can least afford it, who are disproportionately black, Latin American and Native American communities,” observed Lisa Stifler, director of policy at State of the Center for Responsible Lending. “Abusive and expensive payday loans and other loans make the situation even worse. Strong interest rate ceilings on state and federal loans are key to alleviating the debt burden so many have been forced to live with. “
A recently updated map from CRL shows the interest rate for a typical $ 300 payday loan. It highlights the financial misery of triple-digit interest rates where they are legal. Many states with large numbers of consumers of color have several of the highest rates: Texas with 664%, Missouri with 527%, and Mississippi with 521%.
At the federal level, lawmakers are expected to reintroduce a payday loan bill that would give consumers and veterans the same 36% rate protection as the Military Loans Act (MLA). Dubbed the Fair Credit for Veterans and Consumers Act, the measure is expected to garner the same broad, bipartisan support that MLA has received.
Readers may recall that years ago, following extensive research and hearings, the Consumer Financial Protection Bureau (CFPB) under the Obama administration issued an administrative rule to end payday loan debt traps.
However, under the Trump administration, the rule was shattered by eliminating its repayment capacity standard. This underwriting practiced by mortgage lenders, credit card companies and other lenders prevents lenders from incurring more new debt than they can afford.
Last year, a consumer coalition wrote to leaders in Congress about their opposition to the removal of this key subscription, especially when the pandemic has imposed severe financial stress on consumers with the least financial resources. In a March 2020 letter, the lawyers wrote in part:
“Predatory lenders are known to prey on the most vulnerable, including the elderly, veterans, low-income communities, African Americans and Latin Americans. Many of these communities were already struggling before this crisis and will sink further into economic instability because of it. Congressional efforts to help Americans should not be undermined by predatory lenders tricking consumers into 100% or even 300% APR loans. We want to make sure that Congress’ aid to our families will cover food, shelter and other necessities, not paying off loans with exorbitant interest rates.
With a new president and a new candidate for a five-year term as CFPB director, federal action on wage reform could come quickly.
Rohit Chopra, President Biden’s candidate, previously served at the CFPB under Director Richard Cordray and as the agency’s student loans ombudsman. His nomination hearing on March 2 by the Senate Banking, Housing and Urban Affairs Committee was the second time in three years that Chopra faced Senate confirmation. Three years ago, he was unanimously confirmed to serve on the Federal Trade Commission. This bipartite approval should encourage confirmation from the CFPB.
In his remarks to the Senate Bank, Chopra noted: “[D]Due to the economic devastation caused by COVID-19, millions of people face the prospect of losing their homes, with communities of color particularly at risk. Many have seen their jobs disappear and will not be able to easily resume their mortgage payments. ”
He continued, “While there are encouraging signs that the tide is turning, we must not forget that the financial lives of millions of Americans are in ruins. Experts expect difficulties in a number of consumer credit markets, including an avalanche of defaults and auto repossessions. “
“Congress has tasked the Bureau of Consumer Financial Protection to carefully monitor markets to identify risks, ensure compliance with applicable law, educate consumers and promote competition,” said Chopra. “This not only helps protect Americans from fraud and other illegal behavior, but it also ensures that law-abiding businesses of all sizes can compete.”
Hoping that the CFPB will soon return to its mission.
Charlene Crowell is a Principal Investigator at the Center for Responsible Lending.