Grassroots and consumer organizations are in the final days of a giant battle with the payday lending industry, which appears to have pulled out all the stops to protect itself from tough new regulations from the Consumer Financial Protection Bureau.
Since March 2015, the CFPB has been working on the first federal rules for the payday and car title lending industry. With average interest rates edging towards 400 percent, this is a sector rife with just the kind of predatory practices the CFPB was created to stop. After releasing a proposed rule in June, the Bureau has invited the public to weigh in, but the comment period closes this Friday. At that point, it will be up CFPB – and its Director Richard Cordray – to act, finalizing a rule that’s been years in the making.
Today, as the comment period nears its end, Sen. Jeff Merkley joined fair lending advocates and a payday borrower to demand the CFPB stand with consumers by strengthening the proposed rule on payday lending.
“Payday loans look great on paper,” Senator Merkley said, “Here is a quick, easy to get loan that’s a little financial life raft to get you through some payment over the next week or two. That sounds wonderful, but it’s not the reality. It’s not a life raft, it’s an anchor. It’s an anchor that drags working families deeper and deeper into a vortex of debt.”
That gap between how payday lenders advertise their product and the reality of taking out a payday loan is something the CFPB should be paying close attention to as they sift through the comments submitted by the public.
Rigging the System
Given that the payday industry’s business model involves rigging the system against borrowers, it shouldn’t come as a surprise that they’d try to rig the regulatory process, too.
Last week, the Huffington Post reported that hundreds of comments with purportedly unique borrower stories contain identical passages. For instance:
Forty-nine customers somehow ending up independently writing messages containing these exact two sentences: “To avoid bouncing a check, I turned to a loan to help pay some bills. I found that it was a great choice for me and I was able to pay my power bill on time and without penalty.”
With millions of Americans caught in the debt trap, payday and auto title lenders interact with thousands of borrowers everyday when they come in to make payments or take out a new loan. While we can’t know for sure, it certainly looks possible that borrowers are being coached, or even coerced, into commenting in the industry’s favor. In essence, it appears payday lenders are using the very people they are abusing to protect their abusive practices.
If the Shoe Fits
That tactic would appear to line up closely with Senator Merkley’s experience in Oregon in 2007, when he was working on a state law that would cap interest rates at 36 percent on payday and car title loans. According to Merkley, when the rule was in committee, he started receiving hundreds of letters from payday borrowers demanding that he leave the industry as it was.
“The payday loan industry arranged for people to write a letter at the point that they were at the counter to weigh in and say this was a bad idea,” Merkley said. “Then they copied all those [letters] and mailed them to me one envelope at a time, so the post office was actually delivering bags of mail.”
Wondering why in the world anybody would want to continue paying a 400 percent interest rate, Merkley had his staff randomly pull letters so that he could contact the borrowers who sent them.
“I can tell you,” Merkley said, “Not a single family of those who had submitted comments that we were able to reach was actually opposed to reform.”
Unfair, Abusive, and Deceptive
As the CFPB sifts through the comments submitted by the public, they should be sure to push past comments that may have been coerced by the industry and look to uncover the real story behind payday lending.
A new report from People’s Action and Americans for Financial Reform details stories of everyday people who went looking for a short-term fix and got stuck in a seemingly endless cycle of debt.
Harold Carnes, who lives in Las Vegas, Nevada, is one of those borrowers. Carnes took out a loan after his hours working for McDonald’s were cut. When his hours didn’t improve, he took out a second loan from a different company. Soon Carnes was taking out a third loan. The debt trap had snapped shut.
“The fees and the interest alone were out of hand and completely unmanageable," Carnes said. “The loan companies went into my meager bank account, that left my bank account overdrafted with the fees, and my account ended up being closed.”
Carnes' story lines up with the data. The CFPB’s own study found that four out of five people who take out a payday loan are forced to roll over or renew the loan within 14 days. Payday and car title lenders may advertise their products as a solution for customers looking for short-term, small-dollar loans. But because lenders fail to assess a borrower’s ability to repay, the reality is that people are saddled with long-term debt at soaring triple-digit interest rates. The impacts can be devastating.
In addition to losing bank accounts, Senator Merkley noted some of the other things that happen to families in the debt trap: “The kids who are going to be able to participate in a sport, don’t get to participate in a sport. The family that needs to repair their car to get a job, can’t repair their car. The family that hopes to have a credit rating that would enable them to buy a house has their credit rating destroyed.”
This Fight Isn’t Over Yet: Make Your Voice Heard
Fortunately, there’s still time for the CFPB to get the real story about the devastating impact payday loans have on American families.
Along with the report that’s being released today, fair lending advocates announced that they’ve collected more than 400,000 comments from everyday people across the country calling for the CFPB to write a strong rule that can truly stop the predatory lending practices that are rampant in the payday and car title lending industry. (If you haven’t yet made a comment in support of a strong rule, make one here today before the comment period closes.)
Now it’s up to Director Cordray and the CFPB to take action. Will they listen to the real stories of payday borrowers and fulfill their mission of protecting America’s consumers from unfair lending practices?