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The Consumer Financial Protection Bureau should not side with payday lenders

People at their most desperate are at their most vulnerable, and the greater their need for help, the fewer their options.

At the corner of Economic Distress and Limited Options is a payday loan storefront eager to exploit the situation. In August, new federal rules from the Consumer Financial Protection Bureau (CFPB) were scheduled to go into effect to better protect payday loan borrowers, but the Trump administration is proposing to dismantle these protections.

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There are more payday lenders in California than are McDonalds, and their storefronts are more likely to be found in low-income Latino and African-American communities. Their products are targeted at people who are already burdened with high debts and low incomes. In fact, more than half of payday loan borrowers have incomes of $30,000 or less, according to the California Department of Business Oversight.

In California, the average annual percentage rate for borrowing a payday loan is a 377%. Lenders acknowledge it’s expensive, but claim that it’s OK because the loans are just a “one-time fix” for a financial emergency. But for the majority of borrowers, the reality is quite different.

A payday loan has to be paid back two weeks after it’s made, and most borrowers simply can’t afford to repay it, which is why four out of five borrowers either roll over or renew their loans within 14 days, according to the CFPB’s own research. Each time a borrower rolls over their loan, they incur more costly fees, and it should surprise nobody that 70% of the transaction fees collected by lenders last year were from people who had seven or more loan transactions.

This “debt-trap cycle” is so profitable that in 2014 the CFPB discovered Ace Cash Express’ employee training manual included a diagram explaining how to keep borrowers caught in the trap.

Under President Obama, the CFPB developed new rules focused on these high-cost lenders. The measures would protect borrowers while also preserving their access to safe credit. The most important provision, the “ability to repay” requirement, would have stopped borrowers from getting caught in the debt trap by requiring lenders to determine a borrower’s ability to repay a loan before they made it.

But on Feb. 6th, in a contradiction of its very name, the bureau announced it was reconsidering this requirement, and that it would not go into effect in August 2019 as previously scheduled. By reversing course, Kathy Kraninger, the CFPB director and a Trump appointee, is signaling to lenders that protecting their profits is a higher priority than fulfilling the bureau’s mission of protecting consumers.

The CFPB was required to ask for public comments on this change, and thousands of borrowers and advocates across the country weighed in, urging the bureau to keep this requirement. Simply put, if the administration eliminates it, then payday lenders will continue preying on communities of color, preventing them from accumulating assets, the foundation of economic mobility.

If you’re concerned about abusive lending, I encourage you to watch out for the CFPB’s final decision on this rule. Will Director Kraninger listen to borrowers, and implement the “ability to repay” rule? Or will she side with lenders whose profits depend on ensnaring borrowers into unaffordable debt traps?

Paulina Gonzalez-Brito is the executive director of the California Reinvestment Coalition, which is based in San Francisco.
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