Protection against predatory lending gone, by Charlene Crowell

8/13/2020, 6 p.m.
As COVID-19 continues to wreak havoc throughout the country, the Consumer Financial Protection Bureau recently took an ill-advised and untimely ...
Charlene Crowell

As COVID-19 continues to wreak havoc throughout the country, the Consumer Financial Protection Bureau recently took an ill-advised and untimely action.

On July 7, the agency gutted its own 2017 payday rule that required lenders to first determine whether a consumer could afford to repay the high-cost loan.

This regulatory reversal represents a financial favor to payday and car title lenders, and certain harm to

consumers who are just a few hundred dollars short for their monthly expenses. In very real and measurable ways, the agency created to protect consumers gave a green light to predatory lenders to continue to prey upon the nation’s poorest and most vulnerable consumers.

“There is never a good time to enable predatory loans carrying 400 percent interest rates,” said Mike Calhoun, president of the Center for Responsible Lending. “But this is the worst possible time. The pain caused by the CFPB gutting the payday rule will be felt most by those who can least afford it, including communities of color who are disproportionately targeted by payday lenders.”

The COVID-19 pandemic has jeopardized the ability of people to safely go to work, altered how students try to continue their studies and imposed grim realities in meeting life’s most basic needs like food, shelter and utilities.

Consumers affected by job layoffs also were hit with the loss of the additional $600 weekly in federal unemployment benefits through the federal CARES Act that expired on July 31. Additionally, renters who have managed to preserve their housing even when they could not pay should also be mindful of whether eviction notices will come their way. These circumstances carry the potential for America’s most cash-strapped consumers to seek and become financially trapped in unaffordable predatory loans.

The lure of “quick and easy” cash entraps an estimated 12 million American consumers each year. Instead of a short-term financial fix, most loans last several months or longer to fully repay. CRL research finds that the typical payday loans are in strings of 10 or more. Further, the amount of interest paid on the loan often exceeds the amount originally borrowed.

Even with decades of consumer advocacy, triple-digit interest on payday loans remains legal in 34 states. In these locales, the profusion of payday and car title stores located in Black and other communities of color increases the likelihood of consumers becoming financial prey that ensures lenders of an annual $8 billion in fees alone.

“By disproportionately locating storefronts in majority Black and Latino neighborhoods, predatory payday lenders systematically target communities of color, further exacerbating the racial wealth gap,” said Rachel Gittelman, financial services outreach manager with the Consumer Federation of America.

“The CFPB has no basis for gutting the heart of common sense protections that merely required payday lenders to do what responsible lenders already do—ensure that the borrower has the ability to repay,” said Lauren Sanders, associate director of the National Consumer Law Center. “The evidence to support the debt trap of payday loans is overwhelming and the CFPB’s flimsy excuses for repealing protections do not stand up.”

(In Virginia, under a new Fairness in Lending Act that goes into effect Jan. 1, 2021, the annual interest rate on payday loans is capped at 36 percent. However, other finance charges and monthly service fees are allowed. The maximum amount of such loans also is raised from $500 to $2,500 and sets the duration for a maximum of 24 months.)

If a 36 percent rate cap is good enough for the nation’s military to be protected from predatory lending — which is the law for service members under the federal Military Lending Act — it is time to extend that same protection to the civilian population.

The writer is a senior fellow with the Center for Responsible Lending.