In 2014, the Fresno City Council unanimously passed an ordinance to restrict the growth of payday loan stores in town, which was an important step in limiting the damage caused by these lenders, who charge an average interest rate of 366 percent APR. While there are still over 50 payday lenders in Fresno and over 2,000 in our state, a federal agency, the Consumer Financial Protection Bureau, has proposed a new rule to better protect borrowers who use payday, car title and high-cost installment loans.
The proposed rule is a strong step forward, and, with a few additional tweaks, it could be even more effective at preventing the abusive practices that take place every day in Fresno and other California cities.
Payday loans are advertised as a “quick fix” for a one-time financial emergency (such as an unexpected car repair), but “quicksand” would be a more accurate description. According to The Pew Charitable Trusts, 12 million Americans take out payday loans each year, spending $9 billion on loan fees, adversely affecting our local economies.
Almost every borrower we’ve spoken to was unable to repay the loan when it came due two weeks after they took out the loan. Instead, they borrowed “back to back” loans, often more than once, gaining relief for two more weeks, but paying more fees and sinking deeper into debt.
Pew Charitable Trusts notes that “the average payday loan borrower is in debt for five months of the year, spending an average of $520 in fees to repeatedly borrow $375. Moreover, the “average fee at a storefront loan business is $55 per two weeks.” It’s no surprise that 64 percent of the fees payday lenders collected in 2015 came from Californians who had seven or more payday loans. This cycle of repeated borrowing has been labeled the “payday loan debt trap.”
The consumer bureau’s rule-making is an important opportunity to protect people struggling to make ends meet from financial predators looking to make a buck off people’s hardships. This is especially important for communities such as Fresno and others in the Central Valley, which are greatly affected by the issues of poverty and disinvestment.
One way the bureau can stop the debt trap is by requiring all lenders to assess a borrower’s ability to repay the loans before they make them. This would ensure borrowers aren’t faced with a “lose-lose” situation of either borrowing repeatedly or not being able to pay their other major expenses because they are indebted to payday and other high-cost lenders.
However, under the bureau’s draft rule, the first six payday loans a borrower takes out (each year) could be exempt from this underwriting requirement. We believe six predatory loans are six too many, and that the bureau should drop this loophole when it enacts a final rule. Borrowers would also be better served by stronger protections to prevent loans from being rolled over repeatedly.
For the bureau to enact strong regulations, it needs support from various stakeholders, including our members of Congress. Unfortunately, some of our representatives from the Valley appear more eager to protect the industry than their constituents. They’ve voted to weaken the bureau, to limit its funding, and to restrict its ability to regulate certain industries such as auto loans. Given the recent developments with banks such as Wells Fargo and lenders such as Lend Up, we believe our elected leaders should support the bureau, not weaken its ability to ferret out bad behavior.
The bureau is accepting public comments on the draft rules until Friday. We encourage members of the public, especially current and past borrowers, to seize the day and share their experiences and views with the bureau on these important rules.
Liana Molina is the director of community engagement at the California Reinvestment Coalition. Matthew Ari Jendian is a professor of sociology at Fresno State.