The Lie at the Heart of the Payday Predator’s Playbook

Liz Ryan Murray

You wouldn’t toss a drowning man a life vest filled with cement and claim to be their savior. Neither would you take credit for offering gasoline to a family whose house was on fire.

Offering a 300 percent interest loan to someone struggling to pay the bills is just about as much help. Instead of improving their financial situation, it makes things worse. But that’s the argument the payday and car title loan industry is trying to make as they fight against new regulations from the Consumer Financial Protection Bureau.

Contrary to industry lies, predatory payday loans do not provide access to credit. Instead, lenders take advantage of borrowers’ financial need to trap them in debt indefinitely. Payday loans are a quick and certain path to financial ruin for millions of American families.

Fortunately, we have a chance to change the rules right now and protect people when they are most vulnerable from these predatory lenders. But time is running out.

We’re one day away from the close of a nearly 120-day comment period on proposed payday industry rules from the Consumer Financial Protection Bureau (CFPB). If done right, the new rules will drain some of the poison out of the payday and car title lending business.

At the end of the comment period, Bureau Director Richard Cordray, and his staff, will sift through the mountain of comments that have come in from throughout the country calling on the agency to release a strong final rule that shuts down the payday lending debt trap once and for all.

Beware – in that pile of comments there will be many from payday lenders crying that they shouldn’t have any rules at all so that they can generously continue to provide “access to credit.”

Let’s be crystal clear: the lenders are lying. At the heart of the payday industry’s argument is a flat-out fabrication that what they do helps struggling consumers. In truth, their whole business model is predicated on trapping borrowers in loan after loan of unaffordable debt. There’s no reason that lenders can’t offer affordable, small-dollar loans to consumers at reasonable rates that will prevent them from falling into an endless cycle of debt. No reason but greed and a lack of morals.

The bureau’s own research shows that about 4 out of 5 payday loans are taken out just to pay back the last payday loan or fill the hole that interest and fees on the first payday loan blew in their budget.

Each time a new loan is taken out, more fees and more interest are paid to the lenders. People routinely pay back two times or more the original amount borrowed. Payday lenders’ own training materials teach workers how to keep churning the loans and luring borrowers into more debt.

So what exactly are these horrendous rules the payday industry is fighting so hard against? It’s actually pretty simple: lenders should only make affordable loans that borrowers are able to pay back.

That’s it. Really.

Payday lenders make loans they know well and good people can’t afford. That’s why they demand access to the borrower’s bank account or hold their car title hostage. The lenders always get paid first. When the well is dry and the borrower has no money left for rent or food, the lender reels them in for another 300 percent loan.

Harold Carnes, a former payday loan customer in Las Vegas whose story is recounted in a new report from People’s Action and Americans for Financial Reform, puts it this way: “Payday lenders promise help, but they deliver a nightmare.”

The strong payday rule that congregations, communities and consumer advocates are clamoring for will require lenders who want to continue to make high costs loans, also make sure those loans can be repaid. This rule doesn’t shut down access to responsible credit, it makes more room for it.

Affordable loans, like those with 36 percent interest or equally affordable loans offered by many credit unions, can continue to be made under the proposed new rules. With the slick-marketed debt trap loans off the market, those good, affordable loans can thrive.

If the Consumer Financial Protection Bureau gets this rule right, borrowers around the country will have real, affordable options much more readily available. They’ll get loans that don’t sink them, but buoy them. They’ll get loans that can be affordably paid back.

It’s no wonder the payday industry is opposing such common sense regulations. They’re in the business of trapping people in debt. But the bureau was created to stop just this kind of unfair financial practice. That’s why it’s vital that they publish a strong final rule to ensure that borrowers have access to the safe, responsible credit they need.

Liz Ryan Murray is the policy director for People’s Action Institute.

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