When low-income people struggle to make ends meet, predatory payday loans are often their only option. They borrow small amounts of money with short repayment periods and high fees that result in average interest rates well over 300 percent. The industry extracts billions of dollars in profit from the poorest communities in the country each year, and the vast majority of its customers end up taking out new loans to pay back the original borrowing, launching a cycle of debt that is difficult to escape. The average customer pays $520 just to borrow $375, and the horror stories are far worse than the averages.
Critics of the payday loan industry had a hard time getting traction in state legislative sessions this year, though. The industry defeated or watered down reform pushes in Louisiana, Mississippi, Alabama, and a handful of other states. Lawmakers even tried to invite the industry back into Pennsylvania, one of the few states that prohibits payday loan storefronts.
But news this week is giving opponents of the exploitative financial practice some reasons for optimism. Four developments this week indicate that reformers are finding their footing again after stumbling through statehouses all spring, which should give the millions of people currently forced to rely on payday and car-title loans some hope that things won’t always be this way.
1. A troubling industry-sponsored “reform” effort died. On Thursday, Gov. Jay Nixon (D-MO) vetoed a widely-criticized reform bill that he said “provides false hope of true payday lending reform while in reality falling far short of the mark.” The bill was advertised as reform, but would have still allowed annual interest rates as high as 900 percent, and the industry had lobbied for its passage. “It’s no surprise that an industry that makes billions by trapping the working poor with false promises and dirty fine print would try to stay in business by doing the same thing to lawmakers,” a group called Communities Creating Opportunity wrote in a press release celebrating Nixon’s veto.
2. A major payday lender has to hand over millions of dollars. Ace Cash Express (ACE) agreed to pay a $5 million penalty and refund $5 million more to customers, the Consumer Financial Protection Bureau (CFPB) announced Thursday. The agency said ACE harassed tens of thousands of debtors by phone, threatened them with jail time, and called their bosses to share details of their financial hardship. Such debt collection practices are illegal, and ACE disputes the agency’s claims but chose to settle rather than continue fighting. The CFPB has been cracking down on both debt collectors and payday lenders since late last year, winning tens of millions of dollars in fines and reimbursements.
3. Congress is looking at regulating payday lenders. Part of what’s made the payday lending business so hard to stamp out is that lenders are clever about exerting influence over lawmakers. But while many members of Congress carry water for predatory lenders who donate to their campaigns, others are looking to cap interest rates nationwide. Rep. Matt Cartwright (D-PA) is rounding up co-sponsors for a bill to cap interest rates and combat predatory lending to “end the vicious cycle of dependency that predatory lenders extract from consumers,” and plans to introduce the bill next week, according to a press release. Cartwright expects to be joined by Rep. Steve Cohen (D-TN), whose role as head of the Democratic Congressional Campaign Committee may give the bill some extra pull with colleagues. The legislation is modeled on a bill proposed last year by Sen. Richard Durbin (D-IL), who is also expected to lend support to the renewed effort. Separately, the Center for American Progress issued a report Thursday calling for a variety of reforms including a federal rate cap, local zoning rules to target the storefront lenders whose neon signs offer a deceptive lure to needy people, and innovative banking practices that would target the same communities that currently lack access to normal financial services.
4. Elizabeth Warren backed major payday lending reform. Writing in U.S. News and World Report on Monday, Sen. Elizabeth Warren (D-MA) lent her political weight to the idea of making the post office a banking option for the people who will still need short-term high-risk loans even if predatory lending were eradicated. Giving the U.S. Postal Service authority to extend affordable, non-predatory short-term credit to those in need would mean someone who needs quick cash to pay bills or meet an emergency expense could get it without ending up in the sort of debt cycle that makes payday lenders rich now. The USPS already has the authority to perform those kinds of financial services, and it already has physical locations in the many poor and rural communities that banks have abandoned.