In January, the Consumer Financial Protection Bureau (CFPB) announced it would implement new regulations designed to curb abuses of the payday loans industry, including high fees and charges.
While some analysts like those over at American Banker opposed the measure, seeing it as federal government regulation strangling “the small-dollar, payday loan market, destroying a lifeline of credit for millions of responsible, low-and middle-income Americans,” federal action may be necessary to stop minority communities from being trapped in endless cycles of debt caused by predatory lending.
What are payday loans? These are usually loans taken out for small sums of money at high interest rates, designed to be repaid when the borrower receives their next paycheck, as Marketplace notes.
“To qualify for a loan, borrowers need a checking account and proof of income. Lenders do not assess whether or not the borrower has the ability to actually repay the loan. This is one of the areas the Consumer Finance Protection Bureau is interested in. It’s considering laws that would require lenders to actually access a borrower’s ability to pay the loan back, or limit the number of loans a borrower can take out.”
According to a report by the Center for Responsible Lending, these companies have made $2.5 billion in fees since 2005 in the state of Florida. All the numbers show a rapid increase in lending, with the number of transactions, total loan volume, and total fees consistently increasing year after year.
In Florida alone, the loan industry extracted $311 million in fees from communities in 2015, compared to the $186.5 million in 2005. Yearly transactions increased from 4.6 million in 2005 to 7.9 million in 2015, and annual volume increased from $1.73 billion to $3.13 billion. Florida currently has more open payday loan businesses than Starbucks.
Disturbingly, the CRL report noted that 83 percent of Florida payday loans were to “trapped borrowers,” meaning Floridians with seven or more active loans per year. These types of predatory loans also have a popularity among senior citizens, and payday lending was disproportionately concentrated in the black and Latino communities.
Minority community areas were found to be more than twice as likely to have an overwhelming concentration of storefront payday loan businesses, with about 8.1. stores per 100,000 people in African-American and Latino communities, as compared with a four to 100,000 ratio for predominately white neighborhoods.
The National Council of LaRaza released a study in conjunction with the CRL, highlighting the systemic discrimination in the industry and the failure of state laws to deal with these types of loans and help borrowers escape the endless trap of debt.
“For customers who find themselves in desperate or emergency situations, a payday loan can seem like a lifesaver,” the Council wrote. “The reality is that these lenders trap their customers in an unending cycle of debt.”
Of course, Florida is only a single U.S. state – Pew Charitable Trusts says that 12 million Americans take a payday loan each year, paying a collective $7 billion in fees.
“The average payday loan borrower is in debt for five months of the year, spending an average of $520 in fees to repeatedly borrow $375,” Pew reports. “The average fee at a storefront loan business is $55 per two weeks.”
Many suspect that the new regulations proposed by the CFPB, set to take place sometime in the spring this year, will affect the terms and conditions of borrowing and possibly regulate the interest rates and junk fees that can be pitted against a borrower. It is hoped that the new regulations will block the loans deemed most harmful to consumers. New and empirically measurable guidelines for these regulations would be the best outcome since those could be easily enforced and limit industry loopholes for lending.
[Photo by Dan Kitwood/Getty Images]