Wiggins: It’s a New Day in the Struggle Against Bad Lending Practices
Friday, March 13th, 2015
By Dana Wiggins, Richmond Times-Dispatch Op-Ed
Last week, Richmond became the latest battleground in the fight over high-cost loans and the predatory practices that go with them.
On Thursday, March 26, the Consumer Financial Protection Bureau (CFPB) held a public field hearing on small-dollar payday, car-title, open-ended line of credit, Internet and installment loans. This hearing took place on the same day the CFPB announced its working draft of proposals and ideas for rules dealing with these loans, which typically start out small — just a few hundred dollars in some cases — but can quickly turn into debt traps as a result of fees that often end up vastly exceeding the amount that was originally borrowed.
Here’s how they work: As a pre-condition of the loan, the payday lender gains access to the borrower’s checking account, and when the next payday comes, the lender collects before the borrower can buy groceries or pay bills. The interest rates are so high (over 300 percent on average) that people cannot pay off their loans while covering normal living expenses, so they take out another loan and pay another fee to buy time.
As someone who talks on a weekly basis with borrowers of high-cost credit of all types on our hotline, I hear the mixed feelings of many borrowers. They are thankful to have extra money (notice I said “money” and not “loans”) to cover the shortfalls caused by lost or stagnant wages and income, and the drain of long-term medical bills, and the occasional surprise event, such as car repair — but they also hate the fact that the cost of the money borrowed is so high that they can never get back to where they used to be financially, and almost never ahead of where they started.
Take Margaret, for example, a retired state employee. Her retirement cost-of-living increases do not cover all of her expenses, as she has been retired more than 15 years. The maintenance of her home and vehicle, her medical expenses, including medications, and food take up most of her income. An increase in the cost of her life insurance put her monthly expenses slightly over her income, and she went to a payday lender to fill the gap with a loan for $500. After many months of re-borrowing one loan after another, she realizes that if she doesn’t re-borrow continually, she will never be able to make her monthly bills moving forward with the lump sum balloon payment of $635 always due.
Margaret’s story is all too common among those on fixed incomes.
The damage high-cost credit does to the Virginians in debt and their families is nearly $172 million in fees and interest each year. What is most shameful about this situation is that the lenders and their employees claim to be out there to help people in their time of need, while in reality they set many up for failure in the future.
This business model is based on re-borrowing and the payday lenders knowing they will get their money first, before the borrower’s other bills get paid. This decreased risk means they do not necessarily check if borrowers have the ability to repay, given their income and expenses.
Many payday and other high-cost lenders fail to ensure their loans are affordable, given a borrower’s expenses, and instead rely on aggressive collection tactics, including harassment of family friends and even employers, and negative reporting to credit bureaus. This robs many borrowers of opportunities to secure a foothold in a mainstream financial services market. Instead, pushing safe options further out of reach by locking borrowers into a long-term debt trap and increasing the likelihood of a cascade of other harmful financial consequences, such as excessive overdraft fees, involuntary bank account closures and bankruptcy.
The CFPB has a unique opportunity to get this right and protect millions of people. Key features of a good rule would include:
- requiring lenders to confirm borrowers’ ability to repay in light of their income and expenses (with no loopholes);
- limiting the length of indebtedness, as recommended by the FDIC;
- protecting borrowers’ bank accounts by stopping abuses related to payday lenders’ direct access to a consumer’s checking account; and
- protecting their vehicles, one of a family’s most important assets for financial stability.
My hope is that some of the CFPB’s initial ideas become common-sense rules that stop some current poor lending practices, while keeping access to credit. I want access to credit to set folks who are struggling up for eventual financial success, not lasting indebtedness.
Dana Wiggins is director of outreach and financial advocacy for the Virginia Poverty Law Center. Contact her at Dana@vplc.org or (804) 782-9430, ext 21.
Published: April 4, 2015