With much press around the Consumer Financial Protection Bureau's proposed payday lending rule, the experiences of people in states that have already banned the product have received surprisingly little media attention.
With federal curbs on payday loans approaching, we should look to the experiences of these states to consider the ripple effects that a strong or weak national payday lending rule could have. After all, 90 million people — nearly a third of our nation's population — live in the 14 states and the District of Columbia that ban payday lending.
We are three of those 90 million people. We live in Arkansas, Montana and North Carolina — three states that effectively prohibited payday lending during the last decade. Though our states differ culturally and economically, their experiences with payday lending have been the same. Consumers are much better off without the product. Payday loans are high-cost, predatory products that are marketed as a source of short-term, emergency credit, but they actually ensnare people in long-term debt traps.
States that have banned the product are reporting positive results. Take North Carolina. After the Tar Heel state banned payday lending in 2006, the state commissioned a study in 2007 to examine the effects of the ban. One of the study's key findings: Most former payday loan borrowers reported that the ban had had a positive effect on their households. And contrary to what the payday lending industry would have people believe, the study also found that North Carolina's payday lending ban did not reduce access to credit — a finding that is consistent with the experiences of advocates and credit counselors in other states that ban payday lending.
No longer targeted for high-cost, predatory loans they cannot afford, people in our states have found other ways to meet their financial needs — ways that do not result in never-ending debt traps or lead to unregulated loan sharking as industry insiders like to allege.
It would be wrong to assume, however, that our states don't need a strong CFPB rule. In fact, it is because our states already ban payday lending that we need a strong CFPB rule. We, along with our colleagues in other states that ban payday loans, have fought off countless attempts by the payday lending industry to break into our states with their high-cost, predatory loans. So far, we have been successful. But a weak federal rule that continues to allow payday and payday-like loans could put our states' existing consumer protections in extreme jeopardy.
The danger of a weak CFPB rule is already evident in Pennsylvania, one of the 14 states that ban payday lending. There, the payday lending industry has been pushing legislation to allow predatory long-term loans with triple-digit interest rates. The industry's disingenuous argument: The pro-consumer CFPB gave such loans its seal of approval in its March 2015 blueprint of the payday lending rule.
The CFPB must adopt a strong payday lending rule that sets a high bar for the entire country by including provisions that bolster our states' existing consumer protections. For example, the CFPB should make clear that a violation of a state's usury or other consumer protection laws is an unfair, deceptive and abusive practice. The CFPB has already used its UDAAP authority to go after online payday lenders that have violated state consumer protection laws. With this provision in the CFPB rule, our states' attorneys general would be better equipped to protect our residents from illegal payday loans.
The CFPB should also make clear that companies that facilitate illegal payday lending, whether by generating leads, advertising, or processing payments for payday lenders, are engaging in unfair, deceptive, and abusive practices. Google's recent ban on payday loan ads will make it tougher for payday lenders to target people in our states. The CFPB should do the same.
Most fundamentally, the regulation should require that for any kind of loan, the lender must assess the potential borrower's ability to repay the loan based on the person's income, existing obligations and living expenses. The CFPB's blueprint included a glaring loophole that would allow payday and other lenders to continue to make, in some instances, certain kinds of high-cost loans without regard for the borrower's ability to repay. The CFPB should close this and other loopholes not only to protect borrowers but also to reduce the ability of industry representatives to deliberately misrepresent the meaning and intent of the rule.
The experiences of the 90 million people in the payday loan-free states — which we have come to refer to as “Paydayfreelandia” — show that strong, enforceable protections against payday lending are in people's best interest. The lesson from Paydayfreelandia is clear: The only way to address high-cost, predatory lending is to put an end to it once and for all.
Tom Jacobson is chief executive of Rural Dynamics Inc., a Montana-based consumer credit counseling service. Hank Klein is founder of Arkansans Against Abusive Payday Lending. Al Ripley is director of consumer and housing affairs for the North Carolina Justice Center.