What is Payday Lending?
A typical payday loan is worth 400% annually. Payday lenders can seize money from borrowers’ bank accounts and charge them an additional 400% interest. Payday lenders’ business model relies on making loans borrowers cannot pay back without reborrowing – and paying even more fees and interest. These lenders actually make 75% of their money by borrowers who have more than 10 loans per year. This is a debt trap click to read more!
Payday loans are often associated with higher bank penalties, bankruptcy, delinquency in other bills, and account closures.
Here’s how the debt trap works
- The payday lender will require that the borrower submit a check for the next payday in order to obtain a loan.
- Before the borrower can pay their bills or buy groceries, the payday lender cashes the check.
- People cannot afford to pay their loans and still maintain their normal living expenses because of the high interest rates.
- Borrowers are often forced to take out multiple loans, each one bringing new fees. This is the debt trap.
Average borrower takes out 10 loans, and pays 391% interest and fees. These repeat borrowers account for 75% of payday industry’s revenue. The debt trap is, in fact, the payday lending business model.
We ask that payday lenders are required to provide good loans. The definition of a good loan is simple and widely accepted. A loan that is repayable in full and on-time without causing financial hardship to the borrower is considered a good loan. This definition is what banks and other for-profit lenders use to make good loans. Without the ability to repay provision, this cannot be done.
How to Overcome Hurdles and Stop the Debt Trap
In 2017, the Consumer Financial Protection Bureau (CFPB) finalized a rule governing these high-cost loans. The CFPB is now seeking to rewrite the rule, which would eliminate the ability to repay provision and expose more families to unfair and predatory loans. This move was opposed to the agency’s mission by Mick Mulvaney (current Director).
The rule’s core principle is that lenders must verify that borrowers are able to repay their loans before they lend money. This rule should be repealed as it will allow the payday loan industry access to high-interest loans at the expense of the most vulnerable consumers. The coalition called upon the Bureau to quickly develop regulations to protect consumers against abusive, long-term, high cost loans. It is now clear that consumer protections, in addition to strong state laws like rate caps, must be protected and enacted.
View an interactive timeline of the 5+ year process that the Consumer Bureau led in developing the payday lending rule.
Learn more about the response to the new rule from consumer and civil rights advocates.
Download a two-pager on the provisions of the 2017 rule.
Rent-A Bank Schemes
Predatory lenders worked with banks in order to avoid state interest rate caps between the 1990s and 2000s. Federal bank regulators, the FDIC, Federal Reserve Board and OCC, cracked down on this practice. This scheme is now back and unchecked under the Trump Administration. This subterfuge could be blessed by the FDIC and OCC, which have proposed rules that would allow predatory lenders to lend loans exceeding 100% APR in states with interest rates caps lower than 36%.
Elevate, PaydayChampion Lenders lend at ridiculous rates in states where they are not allowed to. This is done through rent-a-bank programs with banks that are regulated by OCC or the FDIC. These abuses are not being stopped by any regulator.
Fair Credit Act for Veterans and Consumers
The Veterans and Consumers Fair Credit Act would ban predatory payday loans, auto title loans, and other forms of toxic credit in America by:
*Establishing a simple, common-sense limit on predatory lending.
*Avoiding loopholes and hidden fees
*To address budgetary shortfalls, preserve options.
*Low industry compliance costs due to existing compromise rules.
*Upholding stronger state protections.
Auto Title and Installment Loans
There are many variations of the same theme, including car title and installment loans. Unaffordable loans are secured by car title lenders who use the borrower’s car as collateral. Installment loans have a longer payoff period and can replace lower interest rates by more expensive, unnecessary products.