Dennis Shaul's recent op-ed in American Banker argues that the Consumer Financial Protection Bureau's proposed payday lending rules are too harsh. He also insists that the voices of payday lenders have been underrepresented in discussions about forthcoming regulations. Both assertions are inaccurate and off the mark.
The CFPB's proposed outline for small-dollar lending rules is not perfect. There are too many loopholes that might allow payday lenders to get around the ability-to-pay standard and not enough protections against abusive and deceptive lending practices. But they do offer common-sense protections that would help prevent the worst consumer abuses. While Shaul claims that the effect of the rules on the short-term credit market would be "catastrophic," in reality these rules would only be catastrophic to lenders whose business model is dependent on trapping consumers in an endless cycle of debt and charging usurious interest rates.
Unfortunately, abusive lenders are all too common in our communities today. Take Candice, a fellow member of Illinois People's Action, a faith-based community organization of which I am board president. Candice took out a payday loan when her income hit a bump. But when the loan was due two weeks later, the lender took most of Candice's paycheck leaving her with nothing left over to buy food or pay bills. So she took out a car title loan and online loans to try keep up with the debt. Candice lost her car, is deeply in debt and a bulk of her budget goes to paying fees on her loans. She is trapped deep in debt with no hope of paying off the loans.
As a minister, I take the Bible's condemnation of usury and abusive lending to heart. And as the leader of a congregation in an underserved area, I've seen that abusive lending is alive and well today. There are more payday lending storefronts in the United States than there are McDonalds, in addition to thousands of unscrupulous lenders online. These lenders target communities of color and poor communities with outrageous interest rates.
What starts as a fast loan quickly becomes a financial nightmare. A study by the Center for Responsible Lending found that 94% of repeat payday loan borrowers take out another loan within a month of the previous one. The industry depends on desperate borrowers getting stuck in the debt cycle. In fact, a CFPB study found that three-quarters of payday loan fees came from borrowers with more than 10 transactions in a year. This means the payday loan industry's profits depend heavily on a small set of borrowers in real financial distress.
There will always be a need for small-dollar loans. But loans that trap people in debt, burden borrowers with triple-digit interest rates and confuse them with deceptive practices are simply abusive.
Shaul also claims that the CFPB needs to listen to the industry more. This is absurd. The payday loan industry has bought itself a huge megaphone in Washington with the billions of dollars that it wrings out of our distressed communities. In just the last two years, the industry has spent $13 million on political donations and lobbying Congress, according to the nonprofit Americans for Financial Reform. The voices that the CFPB must hear from and heed are the millions of American families who are harmed by abusive lending every year.
Shaul also says that payday lending can help Americans impacted by income inequality. But when payday lenders continue to strip billions of dollars from our poorest communities, they only widen the growing imbalance of wealth.
Helping the nearly 28 million Americans who lack access to traditional banking does not mean abandoning them to the hands of predators like payday lenders. As we've seen in states that have reined in the worst abuses of payday lenders, regulation doesn't make credit dry up. In fact, good lending rules mean that safe, responsible lenders finally have a chance to compete. In those states, banks, non-profits, credit unions and many others have stepped in to offer small-dollarcredit that helps families build a brighter future instead of sucking them down into financial disaster.
However, all too often, abusive lenders have slithered through loopholes. For example, five years after the Military Lending Act, a study by the Consumer Federation of America found that loopholes still left troops and their families vulnerable to predatory lenders. Candice and the millions like her who have been trapped in a cycle of debt need a stronger rule from the CFPB, not a weaker one.
The Rev. Tony Pierce is co-pastor of Heaven's View Christian Fellowship in Peoria, Ill., and board president of Illinois People's Action, a member of National People's Action.