Easy access to fast cash leads to a cycle of debt

I joined President Obama when he came to Birmingham in late March to push for stricter requirements for payday lenders. That same day, the Consumer Financial Protection Bureau (CFPB) unveiled its proposals to protect consumers from predatory lending practices.

One of the CFPB’s key provisions is requiring lenders to assess whether borrowers have the ability to repay the loan on time. This is a fundamental element of any responsible loan. However many payday lenders often lend based on their ability to collect the debt and put themselves first in line by tapping the borrower’s checking account as soon as the borrower receives a paycheck or public benefits. These types of commonsense reforms are long overdue, and I am encouraged by the CFPB’s progress.

{mosads}Sixty-eight members of Congress joined me in sending a letter to CFPB Director Richard Cordray to express our support for the CFPB’s proposals. We strongly urge the industry to work with the CFPB to end unfair and abusive lending practices.

Predatory lending compromises the financial security of millions of Americans, and it’s a problem that’s too big to ignore. Payday loans, vehicle title loans and check advance loans are marketed as easy access to fast cash, but these short-term loans often lead to a cycle of long-term debt. Tighter regulations are needed to protect hard-working Americans such as Alicia, one of my constituents, from falling prey to predatory lending practices.

Alicia needed extra money to help cover her expenses after she graduated from nursing school. She took out a $500 short-term loan, but she couldn’t keep up with the $85 interest payments due every other week. To keep from falling further behind, she took out two more loans worth $500 and worked extra shifts so that she could make the payments. Alicia ultimately paid $2,945 — nearly twice than the amount she originally borrowed — to get out of debt.

Alicia’s story reflects the financial struggles caused by predatory loans, and the numbers further illustrate the problem. Interest rates for short-term loans average 322 percent, boosting the cost of a $1,000 loan to $3,220 over the course of one year. In my home state of Alabama, the typical annual percentage rate (APR) for these types of short-term loans is 456 percent, which pushes the cost of a $1,000 loan to $4,560!

The cost of credit is a huge burden for borrowers, and approximately 80 percent of short-term loans are rolled into or followed by a similar loan within two weeks. It’s a difficult cycle to break — borrowers sink further into debt because of high interest rates and take out additional loans to cover the first one.

Short-term lenders claim their products are intended to provide short-term credit for a one-time expense or a temporary financial hardship. Yet few lenders have provisions in place to determine whether borrowers are indeed experiencing a temporary shortfall or if borrowers are using the loans as rolling income.

These types of loans specifically target financially vulnerable communities where residents have limited access to traditional bank loans or credit. A disproportionate number of these borrowers are African-American or Latino, and the mean income for all borrowers is $22,476.

In Alabama alone, payday lenders collected a staggering $232.1 million in fees last year. When Obama visited my congressional district in late March to discuss payday lending, he noted that there are four-times as many payday lenders in Alabama as there are McDonald’s. There is a payday lender on every corner in some parts of my district — and I want the bad actors in this industry to know that my constituents are not their prey.

Sewell has represented Alabama’s 7th Congressional District since 2011. She sits on the Financial Services and the Intelligence committees.