The most desperate are the most vulnerable. In a booming economy, the wealth gap should narrow, not widen. The rise of the economic ladder for the working poor, especially blacks and Latinos, is threatened by payday lenders eager to exploit the situation with the help of the Consumer Financial Protection Bureau (CFPB).
Earlier this year, at odds with its very name, the CFPB announced it would protect predatory lenders, not consumers. Instead of applying the first comprehensive federal rule that would reduce the debt traps of these lenders by requiring them to consider a borrower’s repayment capacity, the CFPB plans to do the opposite.
Specifically, CFPB plans to remove a requirement in its 2017 rule governing payday loans, vehicle title, and certain high-cost installment loans that lenders determine a borrower’s repayment capacity before granting a loan. credit.
Payday loans thrive in the ground of financial desperation, but are quicksand for the financially desperate. These loans have, on average, an APR of 391%, making it nearly impossible for the borrower to repay it in full before their next paycheck. As a result, the borrower is forced to take out a second loan to repay the first, then a third loan, etc. Payday loans are insidious. CFPB actions keep low-income borrowers in a cycle of debt.
The Center for Responsible Lending has found that the typical payday borrower is trapped in 10 loans per year, and car title borrowers typically refinance the same loan eight times. About 75 percent of payday lenders’ profits come from borrowers who take out more than 10 loans per year.
CFPB’s own research has found that more than four in five payday loans are renewed within a month, usually when payment is due.
Payday loan is a strange business model where success relies on failure of customers. Ultimately, these debt traps will ultimately be paid for by taxpayers in the form of social safety net program costs. This type of product should be banned, especially in black and brown communities where many people cannot afford them.
The Center for Responsible Lending found that in California alone, payday lenders are eight times more likely to be located in Latino neighborhoods. In Florida, Latino neighborhoods have 8.1 payday loan companies per 100,000 population; there are 4.0 stores in predominantly white neighborhoods
A report by Pew Charitable Trusts showed that African Americans are 105 times more likely to take out a payday loan than other races or ethnicities. Not surprisingly, in Chicago most payday lenders are found in the black and brown neighborhoods.
Low income borrowers use payday loans not because they are living beyond their means or even in an emergency, but because of recurring necessities like food or utility bills.
Consumer and civil rights organizations and faith groups have long advocated for restrictions on the greed of lenders. In 2006, Congress passed the Military Lending Act, ensuring that active-duty members of the military cannot be charged more than 36% interest on a payday loan.
Several states and the District of Columbia have passed legislation also capping interest at 36%.
In 2017, under the leadership of President Richard Cordray, appointed by President Obama, the CFPB issued a rule requiring lenders to assess a person’s ability to repay the loan they are applying for. Corday’s successor, President Trump’s candidate Mick Mulvaney, wanted the rule repealed. When Congress refused, CFPB joined payday lenders who filed a lawsuit to have it delayed indefinitely. The lawsuit resulted in the suspension of the August 2019 compliance date.
If the administration succeeds in dismantling this collateral, payday lenders will continue to prey on communities of color and prevent them from accumulating assets that are the basis of economic mobility.
This draining of the limited wealth of Latin American and African American communities through rising fees and high interest rates is having dire consequences for our national economy. We cannot afford to forget the lessons of the Great Recession of 2008, when the failure to protect consumers from abusive and discriminatory loan products resulted in a financial crisis and an economic downturn that many still struggle with. recover.
The irony is that the CFPB was created under the Dodd-Frank Wall Street Reform and Consumer Protection Act to ensure the safety of financial products and services for consumers. Requiring lenders to establish a borrower’s repayment capacity is a responsible policy that benefits everyone if not the coffers of predatory lenders.
Rather than reducing consumer protections, policymakers and regulators should increase them. The deadline for commenting on the CPPB’s proposal will be 90 days after it appears in the Federal Register.
Speak. Speak louder. The deadline to comment on this CFPB action is May 15, 2019. Locking people further into poverty is not good for the economic health and social fabric of our country.
Contact your elected officials in Washington to let them know that you expect the Consumer Financial Protection Bureau to live up to its name and protect the financial well-being of consumers.
Raul I. Raymundo is CEO of The Resurrection Project, a Chicago-based nonprofit organization that advocates for financial literacy, homeownership opportunities, and community development.