Why we need commonsense payday lending rules

Four years ago, our nation experienced an important change in the effort to level the playing field and promote the financial health of all Americans when the Consumer Financial Protection Bureau (CFPB) opened its doors. For decades, Americans had been left without any meaningful voice in setting the ground rules for mortgage lending, credit cards, debt collections, and other financial services that have a profound effect on their pocket books.  

Thanks to the creation of the CFPB in 2011, we have seen a paradigm shift. Americans from all walks of life who felt confused or even cheated by the complexity of the financial world finally have a place to turn for help. Many of the reckless mortgage terms that brought our economy to its knees are now gone. And while the many honest lenders have benefited from clear rules that apply throughout the entire industry, those who would prey on struggling consumers to line their own pockets are now being held accountable.  

{mosads}Yet as we celebrate the many accomplishments of the CFPB, we look forward to another tremendous opportunity for the Bureau to continue its good work. This fall, the CFPB is expected to issue sweeping new rules to help bring an end to the destructive practices we have seen in payday lending and some other types of small-dollar loans. Even if they have never fallen prey to payday loans themselves, we hope that all Americans will encourage the CFPB to get these rules right. 

Payday lending is sold as a quick, easy fix for people who have fallen behind on their bills or have emergency repairs, and have nowhere else to turn for money. They are sold even more aggressively in communities of color still reeling from the financial crisis and years of low wages and underemployment. While there is a real need for short-term, small-dollar credit, too often, payday loans don’t work as advertised. Through a mix of fees that seem reasonable up front, but which quickly snowball out of control, and underwriting that ignores long-term financial health, many people wind up in a deeper hole than when they started.  

Fees for payday loans typically run from $10 to $20 for every $100 borrowed per pay period. So a payday loan of $350, at a rate of $15 for each $100 borrowed, requires a borrower to repay more than $400 in just two weeks. Over the course of a year, that can translate into a rate as high as 400 percent. 

It’s understandable that lenders would charge more for small loans than they would for home or car loans. But as we’ve seen from the 2008 mortgage crisis, if the power to lend is abused, it can turn into the power to destroy. Just as we require drug companies to see that their cures for disease are safe, the cures being sold for financial ailments shouldn’t be worse than the disease itself.  

In the coming months, we’ll hear from industry lobbyists who say payday lenders already underwrite loans to make sure borrowers can pay them back. But there is a big difference between making sure borrowers have funds that can quickly be wired out of a checking account and making sure that borrowers can actually use loans to get back on their feet.  

In too many cases, borrowers are so deep in debt that their only choice is to renew their loans at the same high rates. The CFPB found that nearly half of all payday loan customers take out 10 or more loans every year. Lobbyists for payday lenders know this—indeed, their business model depends on it—and that’s why we can expect to see them fighting along with their allies in Congress to hang on to it.

We’ll also hear payday lenders’ lobbyists argue that this rule undermines “access to credit.” Yet eight years ago, Congress outlawed payday loans to military service members, and nobody—except payday lenders’ lobbyists—argued that soldiers and sailors were being unfairly deprived of access to credit. If it is unfair and immoral to make 400 percent interest loans to people who serve our country, it is unfair and immoral to make those kinds of loans to any American.  

The upcoming CFPB rule will only require payday lenders to do what every lender should do as a matter of common sense: make sure that borrowers can repay their loans, on time, without getting in over their heads and trapped in an endless cycle of debt. This isn’t controversial—simply put, this should be a matter of right and wrong—and we’re hopeful that, with help, the CFPB will get it right.

Henderson is president and CEO of The Leadership Conference on Civil and Human Rights. Murguía is president and CEO of National Council of La Raza. Both organizations are members of the Asset Building Policy Network.