Already home to some of the most abusive payday lending patterns in the country, a group of Florida lawmakers are pushing to expand the predatory products that companies can offer desperate families.
The maximum size of a given payday loan would double under a bill moving through both houses of the state legislature. The measure, which would allow lenders to charge a total of $214 in fees on loan amounts that incur $110 in fees under current law, is expected to be approved by a third legislative committee Monday afternoon.
“This confirms everything we’ve always known about their business model: It’s dependent on being able to get people trapped in these loans,” the Center for Responsible Lending’s Diane Standaert said in an interview.
The new offerings that would be legalized under the bill coming before the state Senate’s Commerce and Tourism Committee would evade new federal Consumer Financial Protection Bureau (CFPB) rules requiring lenders to assess a borrower’s ability to repay. But if the lenders didn’t need to trap people to make their money, then they could happily work inside those rules.
“They can operate the way they do today under that rule up to 6 loans per person per year. So what they’re telling you in trying to get around the rule is their biz model is offering more than 6 loans per person per year,” Jared Ross of the League of Southeastern Credit Unions, which opposes the bill, told ThinkProgress. “That is the definition of the debt trap.”
The Florida bill would give lenders a line of products totally ungoverned by the pending CFPB rule. That rule is under heavy attack by both conservatives in the federal government, notably President Donald Trump’s interim CFPB head Mick Mulvaney. It may not even go into force on schedule if those opponents get their way.
But if it does, Florida’s lenders will just shift all their business into the longer-term, higher-dollar, higher-fee loans envisaged by the legislation, and elude all federal oversight.
Their customers would suffer. A legislative analysis of the bill concludes that the new category of loans would charge a lower annual percentage rate (APR) of interest than current-law loans – 200 percent instead of 300 percent – but that figure is in a bit of a red herring. It is the tendency of payday loans to lock borrowers into long, potentially endless cycles of reborrowing that drives the predatory nature of the industry.
APR figures help to capture the sheer cost of this form of emergency credit, but they don’t show the entrapping nature of the products. Anywhere high-interest payday lending is allowed, the vast majority of loans are made to a minority of borrowers who end up taking out more than half a dozen such loans each year.
Florida law currently forbids lenders from doing business with a borrower who has another payday loan outstanding or who only repaid their last loan fully in the past 24 hours. The legislative analysis paints these provisions, which would be retained under the new bill, as an effective restraint on the debt-trap pattern. But that’s a fiction. Whether a trapped re-borrower is initiating a new exorbitant micro-loan 23 hours or 25 hours or five days after closing the last one out, they’re still landing in the same squeeze.
“Those are just window-dressing to disguise the debt trap,” Standaert said. “The vast majority of loans are taken out within two weeks of people paying back their previous loans, so people are not even able to make it to their next paycheck without reborrowing. These are provisions the payday lenders will support to serve as a smokescreen for their 200-percent, 300-percent loans.”
The industry pulls down roughly $300 million a year in fees from borrowers. The vast majority of its profits come from repeat borrowers trapped in long loan sequences. That will be just as true if someone borrows $1,000 and repays it over two months, as the new bill proposes, or borrowing $500 twice in the same span while accruing lower total fees under current law.
Poor people turn to the heavily-advertised offerings of payday lenders not out of ignorance, research shows, but out of desperation. People know they’re getting a lousy deal in dollars-and-cents terms, but stomach it anyway because they think it is their only or best option. It isn’t.
“As of right now, the general public probably doesn’t understand what alternatives are there,” said Ross, the credit union rep. Institutions like those he represents offer a much cheaper kind of payday advance loan, but they are not a core product for small banks the way they are for the predatory actors in the industry.
“Rocket loans, fast payday loans, you see them all up and down the street,” Ross said. “They’ve done a good job of making themselves readily available and widely known so people are often drawn into that and just go there.”
The credit unions Ross represents oppose legislation to expand payday lending. If the state reversed direction and set a firm cap on interest rates for small-dollar credit – something 15 states and the District of Columbia do currently – the credit unions would need to ramp up their efforts to provide their more affordable, less malicious alternative loan products.
But the idea that payday loans are actually a solution to financial emergencies is wrong. When people do eventually break out of cycles of seven, 10, 13 back-to-back predatory loans, Standaert said, they use the same kinds of tools that are available to them at the initial emergency borrowing point.
“Whether it’s a tax refund or re-budgeting [to save money] or borrowing from friends and family or getting a small alternative loan from a credit union or their bank,” she said, “the same options that people use to get out of the debt trap are things that existed anyway.”
Demand for some version of these products is very real. Millions of people a year end up needing an emergency financial bridge over an unexpected auto repair bill or sudden medical expense hitting at the same time the landlord expects the rent check. So long as the gap between the cost of living and the typical worker’s income continues to widen, the practical need for some form of small-dollar short-term credit will only increase.
The question is, how will that demand be served? Florida is proposing to keep the traditional, deceptive payday loan model in place come hell, high water, or federal regulation.
“I don’t doubt people’s concern for people who are financially struggling,” said Standaert. “This just is a solution that makes those concerns worse. Just because someone’s hungry doesn’t mean poisonous food is the right answer.”