America’s path to the first-ever federal regulations of payday and auto-title loans began Thursday in Richmond, as the Consumer Financial Protection Bureau (CFPB) unveiled a rough outline of how it will regulate high-cost credit products targeted at low-income Americans before a divided crowd.
One attendee told the hearing that her loans “were gonna be two weeks but ended up being two years.” Another described overhearing a payday lending store employee “proactively calling a borrower to say your loan is due in two days, but you are eligible for a rollover, you may want to come in,’” illustrating the businesses’ reliance on the exact sort of repeat borrowing that traps so many people in debt for far longer than the advertisements suggest.
While they don’t advertise this way, payday lenders end up charging more than 300 percent annual interest on average. Thursday’s initial rules proposal specifically identifies common present-day business practices that transform “short-term, emergency loans…into an unaffordable, long-term debt trap.”
But one industry representative disputed the “debt trap” depiction and accused the agency of treating borrowers like “they are not sufficiently intelligent to avoid pitfalls.”
“Our customers are intelligent and responsible, and make hard financial decisions every single day based on their own judgment of what is right for them,” said Ed D’Alessio, head of the national trade association for storefront lenders.
While D’Alessio portrayed the regulatory push as an obnoxious sort of babysitting for low-income borrowers, the regulations being proposed are far more moderate. They would require lenders to tie their charges to the borrower’s actual ability to make payments. D’Alessio’s people would continue to profit by lending where banks won’t — they just wouldn’t be able to set repayment terms that ignore the borrower’s financial reality and too often end up destroying their lives.
While many of Thursday’s speakers jumped in on D’Alessio’s side, several relayed lending horror stories and pointed out gaps in the industry narrative. “I drove here at my own expense to testify on behalf of the poor and vulnerable,” said John Copenhaver, a methodist minister from Winchester, Virginia’s northernmost town. “I wonder how many people speaking and clapping for these loans are employed by the lending institutions.”
Indeed, many speakers were on the payroll. “We are not a trap. We are a bridge to security and financial peace of mind,” said one lending shop worker with a bright yellow “CREDIT FOR ALL” sticker on his lapel. But it wasn’t solely industry people making that argument. Multiple sticker-wearing speakers recounted how a payday or auto-title lender had been their only financial lifeline amid personal hardship. Their stories illustrate the difficulty of what the CFPB is trying to do, while simultaneously misportraying the agency’s proposal.
The industry’s current profitability depends on trapping about half of all borrowers in extensive, expensive cycles of re-borrowing. But rather than accuse the industry of being willfully predatory, the CFPB leans on the data it has gathered about how customers actually experience payday and auto title lending cycles to identify areas that it will regulate. They include some ideas that have been tried with varying success by state legislatures, like rate caps for certain categories of lending and cooling-off periods that prohibit a borrower from getting more loans for a certain time once they have taken out three consecutive loans.
It’s a moderate opening bid, and many changes are likely over the next several months. The agency doesn’t want to put the D’Alessio’s of the world out of business, no matter how much progressive observers might wish to wipe payday lenders off the map. Erasing these businesses would not erase the demand for their services, and for people in dire circumstances, it might even do more harm than good. But the industry’s current way of operating is not sustainable. Hard data illustrate that payday lending profits come almost entirely from customers who get trapped in lengthy lending and re-lending cycles, no matter how intelligent they are when they first visit one of D’Alessio’s clients. The data seem to justify more aggressive reforms, such as Sen. Elizabeth Warren’s proposal to replace private lenders with the postal service. But the CFPB can use existing regulatory authority to curb the worst lender excesses now, without waiting for legislation.
Even under the most aggressive vision suggested by CFPB’s rules preview, these loans would still be very expensive. The most any regulator can do is attempt to blunt the knives these lenders use to gouge their vulnerable customers. To put a real stop to that gouging, you’ve got to address the circumstances that put people under the knife in the first place. Rapacious forms of credit won’t go away until the country finds the wherewithal and political will to lift tens of millions of people out of the kinds of poverty that lead desperate people to believe the too-good-to-be-true neon promises that payday lenders put in the shop window.
John Copenhaver sees the effect of those promises every day thanks to Winchester’s location on the state line. Desperate people are “attracted from states with laws protecting them from predatory practices by the lure, the honey of quick cash, and they’re trapped like flies on flypaper,” Copenhaver told the crowd in Richmond. He later told ThinkProgress that there are more than 20 total lending storefronts in town, popping up in real estate vacated by fast food joints.
Some industry supporters warned of job losses from the regulations, but that claim is contradicted by what little hard data there is on the net economic impacts of payday lending stores. One of the only quantitative studies there is on the jobs and economic growth impacts of the industry found that the stores depress growth and put a net drag on the job market.
Besides, the rules CFPB is weighing would not put these companies out of business. In fact, the proposal includes one significant loophole. The outline’s provisions for short-term loans would still allow balloon payment loans where the entire sum and all fees must be paid all at once at the end of the loan period, Pew Charitable Trusts research officer Alex Horowitz told ThinkProgress. “Those loans consistently fail consumers, so they shouldn’t be on the market. They’re dysfunctional products.” Horowitz said. “Lenders and borrowers cannot succeed at the same time under that section of the rule.”
They also propose real underwriting standards — requirements for lenders to look into the financial background of borrowers and document evidence that the person they’re loaning to will likely be able to pay the loan back more or less on time, rather than walking into a debt trap — that would go a long way toward discouraging the worst predators in the industry. If the final rules have the same shape as the proposal that the agency is seeking comment on now, they would allow lenders to choose between two sets of rules dubbed “protection” and “prevention” that use different types of regulation to tie what lenders can charge to what borrowers can afford based on their earnings and bills.
The bulk of the proposal reflects the best practices of states like Colorado, where moderate regulations have allowed lenders to continue to profit while slashing the average interest rates that borrowers face and eliminating many of the trap-like features of such loans.
Not every industry representative was out to submarine the new federal rulemaking process. “We look forward to working with the CFPB,” said Native American Financial Services Association head Lance Gumbs, signaling that the tribal lending organizations he represents are determined to keep the lights on and the cash moving. “There are more than 17 million people in this country who are unbanked or underbanked, and we intend to serve that need.”