Column: Payday lenders have faced tough new rules protecting consumers. Then Trump took office
Something very important, affecting millions of consumers, will not happen on Monday.
That’s when new protections against predatory lenders and auto title lenders took effect, requiring companies to ensure that borrowers can repay their obligations within a reasonable timeframe and not fall behind. get bogged down in debt.
However, the Trump administration is delaying this perfectly reasonable guarantee for another 15 months and has already declared its intention to scrap the rules altogether, fearing they might be too inconvenient for lenders.
This is the latest example of Trump undermining or eliminating pro-consumer policies initiated by his predecessor, former President Obama, for the sole reason that industry players demanded a lighter touch.
“Despite years of evidence on the harms of payday loans and auto loans, the new leadership of the Consumer Financial Protection Bureau has decided to favor lenders,” said Lauren Saunders, associate director of the National Consumer Law Center.
“They don’t care that these loans get people into a debt trap that can go on for months and months,” she told me.
CFPB adopted the new rules in 2017 and gave the industry $ 50 billion short-term loans almost two years to prepare for the changes.
“Too often borrowers who need cash quickly find themselves trapped in loans they cannot afford,” Obama-appointed former office manager Richard Cordray said at the time. “The common sense protections of repayment capacity rules prevent lenders from succeeding by causing borrowers to fail. ”
Let’s say you borrow $ 400. You would be required to repay the loan within two weeks, plus $ 60 in interest and fees, or the equivalent of an annual percentage of over 300%.
If the loan cannot be repaid – and all too often it is not the case for people living on paychecks – your obligation would shift into a new loan., resulting in a permanent burden of high interest rate debt.
In one 2014 report, the CFPB found that over 80% of payday loans ended up being turned into new loans or followed within days by a new loan. Half of all payday loans resulted in 10 additional loans to pay off the original debt.
Car title loans can be even more inconvenient, especially in a place like Southern California, where your economic livelihood often depends on access to wheels.
Like payday loans, they are a quick way to get money when needed. Unlike payday loans, you put your vehicle as collateral. Not only do title loans carry exorbitant interest rates, but if you fall behind on payments, you can lose your car.
Rebecca Borné, senior policy advisor at the Center for Responsible Lending, said about 20% of car loan recipients end up having their vehicles confiscated and sold by lenders.
“It’s just shocking,” she said. “These loans have a truly overwhelming impact on so many families. ”
Things were to improve from next Monday.
Under the new rules, lenders would have to perform a “full payment test” – which means they would have to determine in advance that a borrower has the financial means to repay the loan without taking on another loan.
In addition, if a borrower takes out three payday loans in “quick succession”, the lenders would have to put them on hold for 30 days. Lenders would also be prohibited from indebting borrowers for more than 90 days in a 12-month period.
“Requiring affordable loans that a borrower can repay without taking out another loan would have protected millions of people who are typically caught by lenders in the trap of high cost debt,” said Christine Hines, legislative director of the National Assn. consumer advocates.
“The new leadership of CFPB does not want to give the rules a chance to work,” she said.
The short-term lending industry went into Chicken Little mode as soon as the new rules were announced a few years ago, arguing the requirements would put thousands of lenders out of business.
This meant, of course, that the industry recognized that its business model depended on endless consumer debt. In a normal world, this would be sufficient justification to proceed with the new protections.
But we are not in a normal world. For President Trump, the industry complaints were a sure sign of the government’s excess.
His Newly adapted CFPB for companies announced earlier this year that requiring short-term lenders to do due diligence on borrowers “would place a substantial burden on the industry” and make it harder for people to access credit. .
Certainly, it is important that people have access to emergency funds in the blink of an eye. Banks, credit unions, government agencies – each can play a role in meeting these needs.
Payday and car title loans are not that financial safety net. These are black holes that can attract the hopeless or the reckless, and then bleed them of all available resources.
Assn. of America, a trade group representing short-term lenders, told me in a statement that it was pleased to see the CFPB’s “flawed” and “misguided” end of regulation.
“The rule of the office (…) was developed according to a predetermined partisan agenda,” he said, adding that the CFPB “has failed to demonstrate the damage to consumers by low-value loans. , ignored unbiased research and data, and relied on misinformation to support its rule making.
Which is true, if you ignore these pesky facts about people stranded for months, if not years, to pay off a loan, or losing their car because interest rates were so high.
Several years ago, Congress had to pass legislation capping interest rates on military loans. One wonders why civilians should be treated any differently.
One also wonders why short-term lenders currently enjoy such influence in Washington.
In 2016, the year Trump was elected president, payday lenders contributed $ 2.8 million to political causes, according to the Center for Responsive Politics. Of that total, 81% went to Republicans.
During the 2018 election cycle, payday lenders contributed $ 2.5 million. Eighty-nine percent went to Republicans.
Last year, the payday loan industry first held its annual convention at the Trump National Doral Miami Resort.
Payday lenders have returned to the Trump-owned hotel for this year’s event.
There was a lot to celebrate.