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A broad and diverse coalition of Christian organizations—including the U.S. Conference of Catholic Bishops—is calling for an end to predatory payday lending.
The coalition, calling itself “Faith for Justice Lending,” describes these short-term, high-interest loans as a “debt trap” and has called on government regulators to enact rules to prevent abuses in lending and collections.
We echo that call.
Earlier this month, the U.S. Consumer Financial Protection Bureau issued a proposal to regulate payday loans, loans against borrowers’ vehicle titles and other high-cost loans. The proposal is now in the public comment stage and new rules could take effect next year.
Advocates who have followed the issue say the proposed rules include some important protections but don’t go far enough. For instance, supporters of reform have been calling for a “5 percent payment option” that would limit monthly installment payments to 5 percent of a borrower’s income and allow a more reasonable repayment period. This option also would allow banks to offer small loans at fees and costs far lower than the loan companies that offer such financial products now.
It’s true that people sometimes are faced with an unexpected expense and need cash in a hurry, especially people with little or no financial cushion to tap. In such cases, short-term loans designed to be repaid from the borrower’s next paycheck can be an important source of help.
But not with the excessive fees and interest rates charged by payday lenders, charges that can add up to interest of more than 400 percent annually and fees that could become higher than the original loan. And not as a snare for low-wage workers who can easily slide into a downward spiral of loan rollovers and re-borrowing just to stay in place.
“Unregulated payday and auto title loans are destroying not only individuals, but also crippling our Texas communities,” said a spokesman for the Texas Catholic Conference. Municipalities in Texas have been enacting laws capping the interest rates that payday lenders can charge, but there’s still a long way to go.
According to studies by the Pew Charitable Trust, more than 12 million Americans take out payday loans each year, spending $9 billion on fees in the 36 states that allow these loans. New York is among the states where payday lending is illegal, but online services are nevertheless eager to match up prospective borrowers with out-of-state or even offshore lenders.
Although payday loans are available only to people who are employed and have a bank account, Pew studies found that seven in 10 borrowers use their loans for regular, recurring expenses such as rent and utilities. Many borrowers earn less than $40,000 a year, are renters rather than homeowners and are separated or divorced.
They are, in other words, struggling and vulnerable.
The Consumer Financial Protection Bureau, created in the aftermath of the 2007-2008 financial crisis, now has a chance to take some assertive action and do exactly what it was meant to do: Protect hard working Americans who are easy targets for financial predators.
With polls showing that 71 percent of Americans—Republicans, Democrats and Independents—favor regulation, it’s clear that true reform will be welcome indeed.
