By Renato Rocha, Policy Analyst, Wealth-Building Project, NCLR
The reckless behavior of financial institutions including banks, credit card companies, and mortgage lenders caused the 2008 financial crisis that cost Americans millions of jobs, billions in taxpayer-funded bailouts, and trillions of lost retirement savings. A lack of consumer protections and oversight of the financial marketplace allowed unscrupulous lenders to target communities of color with unfair and abusive financial products. The Latino community was disproportionately impacted by the economic crisis and is still struggling to recover.
The devastating and widespread effects of the crisis led to the creation of the Consumer Financial Protection Bureau (CFPB), which we view to be the crown jewel of Wall Street reform. In less than six years, the CFPB has already curbed several deceptive practices in the financial marketplace: bringing transparency to the remittance industry, prohibiting credit companies from adding on products that consumers never agreed to, and requiring mortgage lenders to ensure that applicants can afford the home loans they’re seeking. The CFPB is also working on putting protections in place that would rein in predatory payday loans and debt collection practices. Each one of these actions have helped put all Americans on a path to greater financial security.
What Palomarez’s article fails to mention is that payday lenders specifically target communities of color, and their business model creates a vicious cycle of debt that is difficult for most borrowers to escape. In fact, the typical payday loan carries an exorbitant 391 percent APR, is given to borrowers without consideration of their ability to pay it back, and with direct access to their bank account.
At the 2016 NCLR Annual Conference in Orlando last month, NCLR staff was out in full force collecting comments from attendees in support of the Consumer Financial Protection Bureau’s proposed rule to curb payday lenders’ abusive lending practices.
As we’ve highlighted in our Truth in Payday Lending series, the Latino community has especially fallen victim to these shady operators. In the absence of safe and affordable financial products, people desperately in need of cash turn to payday lenders, who prey on our communities. Promising relief, these payday lenders lure struggling Latinos into situations that quickly morph into an endless cycle of borrowing and debt.
We’re going to Orlando this year for the 2016 NCLR Annual Conference. While the Sunshine State has many attractions to offer its visitors and residents, payday loans are not among them.
Readers of our “Truth in Payday Lending” series may recall a report that NCLR released with the Center for Responsible Lending that examined the failure of a state law that was designed to curb the negative effects of payday loans. The report shows payday lenders have stripped a staggering $2.5 billion in fees from Floridians since 2005. In 2015 alone, their shady lending practices yielded more than $300 million for the industry.
Over the last few weeks, readers of NCLR’s blog series “Truth in Payday Lending” learned how the lack of regulation over the payday lending industry has harmed Latinos and other consumers who turn to these products in times of financial need. These unscrupulous and predatory lenders use a business model dependent upon a borrower’s inability to pay a loan. As a result, consumers have lost millions of dollars and been trapped in a cycle of debt.
NCLR and its partner organizations are encouraged by the newly proposed rule by the Consumer Financial Protection Bureau, which would address payday and car title lending—and end this cycle of debt. The proposed rule covers loans which, on average, carry more than 300% annual percentage rates (APR)—a rate much too high for consumers. CFPB’s proposal would establish an ability-to-repay principle for covered loans, based on a borrower’s monthly income and expenses. While this is already a principle for other types of loans, payday loans have not been subject to this important and fundamental determination of a borrower’s ability to afford a loan.
However, the CFPB’s proposal currently contains loopholes that would exempt certain loans from the ability-to-repay requirement. NCLR strongly believes that the rule should contain no exemptions to the loans that would be subject to this provision. In addition, protections against loan flipping, or re-borrowing additional loans to cover the cost of the original, need to be strengthened. Currently, the proposal has a waiting period of 30 days between loans, which NCLR believes should be lengthened to 60 days. Together, these provisions would allow borrowers to stay in the same cycle of unaffordable debt that many are facing now, undermining the protections the rule is supposed to put into place.
NCLR is advocating for the CFPB’s payday lending rule to:
Keep a strong ability-to-repay provision, without exceptions.