Tim Worstall recently took issue with the Center for Responsible Lending’s position that payday loans should be capped at a 36% annual rate. He seemed troubled by the fact that with such a rate cap in place, payday lenders choose to no longer make their predatory loans.
I’d like to offer some clarity. First, yes, it’s true — we do want to see an end to dangerous lending practices such as unaffordable payday loans carrying 300% and 400% interest rates. And second, I’d like to explain why payday loans are predatory.
At the Center for Responsible Lending, we understand how access to safe, affordable credit can help ensure people have a path to building wealth. But access to harmful payday loan products does the opposite. It strips people of their hard-earned income, cars, or even homes. This means we must say no to predatory interest rates that ensnare borrowers in debt traps and say yes to common-sense underwriting to ensure borrowers can repay loans while meeting daily expenses. This is why we support a 36% rate cap (or lower) for small loans that don’t override stronger state consumer laws.
The Center for Responsible Lending’s nearly 20 years of research on payday loans consistently reveals two things: first, that these loans are a debt trap by design, and second, that these products perpetuate economic inequality and the racial wealth gap.
Borrowers have described the debt trap, in their own words, as “a hole that you can’t get out of,” “soul-crushing,” and “a living hell.” As borrowers suffer the harms of these debt-trap loans, private equity plays a growing role in fueling the engines of an unscrupulous industry.
Research has shown repeatedly that high-cost lending storefronts are disproportionately situated in black and Latino communities, even when those communities have the same or higher incomes than white communities.
Thankfully, some state and federal policies have mitigated the harms of these unsafe loans, ranging from the 2006 passage of the 36% rate cap in the Military Lending Act, to voter-enacted 36% rate caps in South Dakota and Colorado in 2016 and 2018, respectively. Sixteen states and the District of Columbia enforce caps of 36% or less, covering nearly 100 million people with this most effective protection against the debt trap. Since 2005, no new state has legalized payday lending.
In 2017, under previous leadership, the Consumer Financial Protection Bureau finalized a rule designed to curb harms caused by payday and car title loans that borrowers cannot afford to repay. The agency spent five years developing these safeguards, considering input from lenders, faith leaders, veteran and military organizations, civil rights groups, consumer advocates, and constituents from across the country.
The government agency engaged in extensive research and data analysis to understand more fully the affect these loans have on consumers, held numerous meetings with consumer advocates and lenders, and found multiple instances of unfair and abusive practices by payday lenders through the agency’s supervision and enforcement process.
This rule is the first of its kind, but unfortunately, it’s at risk of never seeing the light of day.
Today, the Stop the Debt Trap campaign, a coalition of 700 organizations including the Center for Responsible Lending, is urging the Consumer Financial Protection Bureau, now under the leadership of Director Kathy Kraninger, to reject its recently announced proposal to gut these payday loan protections. Instead, the agency should implement the rule as finalized in 2017: It simply requires lenders to verify borrowers have the ability to repay a loan before making it.
An affordable loan is one that a borrower can reasonably be expected to pay back without reborrowing or going without the basic necessities of life, such as food or rent money. This notion of ensuring a loan is affordable is the bedrock of responsible lending practices, and it is strongly supported by voters across this country, more than 75% among Republicans, independents, and Democrats alike.
As written, the payday lending rule will result in fewer families falling into financial ruin. And it will continue to allow credit to flow to those who can afford it, including from community banks and credit unions, whose lower-cost loans are generally not affected by the rule. If payday lenders succeed in gutting the payday lending rule, then millions of cash-strapped Americans will continue to be caught in a crippling cycle of 300% interest loan debt.
To be clear, we need more, not less, rigorous oversight by the states, Congress, and the Consumer Financial Protection Bureau to prevent predatory lending practices from stripping away billions of dollars a year from people already struggling to make ends meet. It’s really that simple.
Diane Standaert is an executive vice president and director of state policy at the Center for Responsible Lending.
