Payday lending is finally getting the attention it deserves. Google recently banned ads for payday loans. The federal government stepped in last week. John Oliver just did a segment on debt collection. What’s going on?
Payday loans are short-term loans, usually for $500 or less with finance charges of up to $30 for every $100 borrowed. That’s an annual percentage rate of almost 400%, compared to 12 percent to 30 percent on most credit cards. A 2013 report from The Pew Charitable Trusts found that payday borrowers can only afford to devote five percent of their income towards loan payments and still cover basic expenses. But payday loans equal one-third of a typical borrower’s income.
Last week, the federal Consumer Finance Protection Bureau (CFPB) took aim at the financial quicksand with new draft rules that would require payday lenders to determine that borrowers can afford to pay loans back and still meet basic living expenses and major financial obligations.
Outside a hearing on the rule in Kansas City, 65-year old Elliott Clark was pleased,telling attendees that he got a $500 payday loan when his wife had $25,000 in medical bills. “That was the bait in the debt trap,” he said, which grew to “$50,000 in five doggone years.” Indeed, payday lending is banned outright in 15 states.
As soon as the CFPB released its rule, Appleseed praised its initiative and promised to provide comments before it is finalized. “The CFPB must ensure that payday loans are not a debt trap dressed up as a lifeline,” I said. “Without protections that are strong and clear, too many payday loans fuel poverty instead of relieving it.”
For decades, Appleseed centers have worked to shine a light on payday lending debt traps in their states, enact reforms to protect consumers, and ensure that the court system treats everyone fairly instead of becoming an assembly line in service of the debt collectors.
- Alabama Appleseed has helped pass bans and zoning ordinances to curtail payday lending in 20 municipalities. Last March, the White House asked Alabama Appleseed to convene payday lending advocates to meet with President Obama during a visit to the state.
- Hawai’i Appleseed is fighting to cap the state’s payday lending rate at 36%.
- Nebraska Appleseed is also fighting for legislation to cap the state’s lending rate, give borrowers enough time to pay their debts back, and provide them with clearer information about loan terms and their own rights.
- South Carolina Appleseed has cut the number of loans made each year by 75%, and cut fees paid by consumers by almost $100 million a year. They’ve done this by passing zoning ordinances to limit the spread of payday lenders, along with legislation to bar offering more than one loan at a time to borrowers and require strict reporting by the payday lending industry.
Texas Appleseed, which released a separate publication last week showing that payday lending fees reached $1.24 billion in 2015, has helped 35 Texas cities adopt affordability standards for payday and auto title loan. They’ve also helped expand a homegrown low-cost alternative loan program, the Community Loan Center, to give consumers low-cost alternatives to payday loans.
In 2012, the national office of Appleseed published a best practices checklist to help trial court judges streamline their handling of consumer debt cases while ensuring basic fairness to debtors.
This summer, Appleseed will work with its centers to provide comments on the proposed rules. Appleseed has been focusing on payday lending for decades, and we’re not going to let up. We encourage you to take a moment to support work like this that is helping so many people build better lives.