The rule would also target longer-term loans with a 36 percent yearly interest rate or higher, restricting lenders from directly extracting money from the consumer’s account, without the borrower’s explicit consent, if they failed to repay twice in a row. Any direct withdrawal from a consumer’s account would also require standard prior notification. The commonsense rule was projected to reduce the industry’s yearly revenue by two-thirds.
Stephen Loveridge’s documentary, Matangi/Maya/M.I.A., appears to start filling in that script, preluding the Grammys performance with footage of the rapper and producer’s breezy home life in Los Angeles. Then we see her arrive on stage in those blazing maternal polka dots, with the Clash-borrowed groove of her smash “Paper Planes” twitching to life, and—
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The law in the United States is very clear – debtors cannot be jailed for failing to pay a debt. Our U.S. Constitution prohibits imprisonment for debt. Our bankruptcy laws are federal laws that enable debtors to file for bankruptcy protection when they are unable to repay their debts. Furthermore, debt collection is a civil law matter, not a criminal matter.. A creditor may pursue collection of a debt through the civil courts in the United States; however, debtors cannot be prosecuted in criminal court for not paying a debt.
The rules should be formally proposed this spring, but the pushback—from the industry and from more-surprising sources—has already been fierce. Dennis Shaul, who, before he became the head of the industry’s trade association, was a senior adviser to then-Congressman Barney Frank of Massachusetts, accused the rule-makers of a harmful paternalism, rooted in a belief that payday-lending customers “are not able to make their own choices about credit.” All 10 of Florida’s congressional Democrats wrote in a letter to Richard Cordray, the bureau’s director, that the proposals do an “immeasurable disservice to our constituents, many of whom rely on the availability of short-term and small-dollar loans.” Representative Debbie Wasserman Schultz, the chair of the Democratic National Committee, recently co-sponsored a bill that would delay the regulations for at least two years.
OBAMA: You take out a $500 loan at the rates that they’re charging at these payday loans — some cases 450 percent interest — you wind up paying more than $1,000 in interest and fees on the $500 that you borrowed … You don’t need to be a math genius to know that it’s a pretty bad deal if you’re borrowing $500 and you have to pay back $1,000 in interest.
A recent law journal note summarized the justifications for regulating payday lending. The summary notes that while it is difficult to quantify the impact on specific consumers, there are external parties who are clearly affected by the decision of a borrower to get a payday loan. Most directly impacted are the holders of other low interest debt from the same borrower, which now is less likely to be paid off since the limited income is first used to pay the fee associated with the payday loan. The external costs of this product can be expanded to include the businesses that are not patronized by the cash-strapped payday customer to the children and family who are left with fewer resources than before the loan. The external costs alone, forced on people given no choice in the matter, may be enough justification for stronger regulation even assuming that the borrower him or herself understood the full implications of the decision to seek a payday loan.
A Review of the Department of Defense’s Report on Predatory Lending Practices Directed at Members of the Armed Forces and Their Dependents, hearing in the U.S. Senate Committee on Banking, Housing. & Urban Affairs, (September, 2006).
DUBNER: Well, here’s what seems to me, at least, the puzzle, which is that repeat rollovers — which represent a relatively small number of the borrowers and are a problem for those borrowers — but it sounds as though those repeat rollovers are the source of a lot of the lender’s profits. So, if you were to eliminate the biggest problem from the consumer’s side, wouldn’t that remove the profit motive from the lender’s side, maybe kill the industry?
Over the last couple of years “payday” loans have become increasingly popular throughout the United States, including in the State of Texas. For a variety of reasons, the rates at which borrowers default on these loans is extremely high. If you have defaulted on a payday loan, or are concerned that you will default on one in the near future, you may be concerned that you will go to jail for not paying the loan. This is not true. You will not go to jail if you do not pay a “payday” loan.
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“Alongside our other new rules for payday firms – affordability tests and limits on rollovers and continuous payment authorities – the cap will help drive up standards in a sector that badly needs to improve how it treats its customers.”
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Prior to 2009 regulation of consumer credit was primarily conducted by the states and territories. Some states such as New South Wales and Queensland legislated effective annual interest rate caps of 48%. In 2008 the Australian states and territories referred powers of consumer credit to the Commonwealth. In 2009 the National Consumer Credit Protection Act 2009 (Cth) was introduced, which initially treated payday lenders no differently from all other lenders. In 2013 Parliament tightened regulation on the payday lending further introducing the Consumer Credit and Corporations Legislation Amendment (Enhancements) Act 2012 (Cth) which imposed an effective APR cap of 48% for all consumer credit contracts (inclusive of all fees and charges). Payday lenders who provided a loan falling within the definition of a small amount credit contract (SACC), defined as a contract provided by a non authorised-deposit taking institution for less than $2,000 for a term between 16 days and 1 year, are permitted to charge a 20% establishment fee in addition to monthly (or part thereof) fee of 4% (effective 48% p.a.). Payday lenders who provide a loan falling within the definition of a medium amount credit contract (MACC), defined as a credit contract provided by a non-deposit taking institution for between $2,000–$5,000 may charge a $400 establishment fee in addition to the statutory interest rate cap of 48%. Payday lenders are still required to comply with Responsible lending obligations applying to all creditors. Unlike other jurisdictions Australian payday lenders providing SACC or MACC products are not required to display their fees as an effective annual interest rate percentage.
That does sound reasonable, doesn’t it? A typical credit-card rate is around 15 percent, maybe 20 or higher if you have bad credit. But to the payday-loan industry, a proposed cap of 36 percent is not reasonable at all.
January 16 was supposed to be the day of reckoning for a notorious predatory-lending industry, when a rule from the Obama administration’s consumer-watchdog agency would finally start to curb a business that’s fleecing the poor. But the day the new regulation was set to kick in, the Trump White House’s newly appointed head of the agency decided to suspend the rule indefinitely, and soon announced a “review” of all agency operations, signaling a shift in mission from protecting Main Street to coddling Wall Street.
There are many different ways to calculate annual percentage rate of a loan. Depending on which method is used, the rate calculated may differ dramatically; e.g., for a $15 charge on a $100 14-day payday loan, it could be (from the borrower’s perspective) anywhere from 391% to 3,733%.
According to Amy Traub of the think tank Demos, “many advocates are worried that it’s the beginning of a larger effort to undo the CFPB’s successful work of protecting consumers.” The payday-lending sector has historically preyed on poor, “underbanked” communities, marketing short-term loans at astronomically high interest rates. Payday loans trade on exploitative debt schemes, as borrowers spiral into a deepening cycle of repeated over-borrowing and financial crisis. Historically, the industry has disproportionately targeted consumers who are extremely poor, black, recently divorced or separated, and renting their housing.
In a profitability analysis by Fordham Journal of Corporate & Financial Law, it was determined that the average profit margin from seven publicly traded payday lending companies (including pawn shops) in the U.S. was 7.63%, and for pure payday lenders it was 3.57%. These averages are less than those of other traditional lending institutions such as credit unions and banks.
In many cases, borrowers write a post-dated check (check with a future date) to the lender; if the borrowers don’t have enough money in their account by the check’s date, their check will bounce. In Texas, payday lenders are prohibited from suing a borrower for theft if the check is post-dated. One payday lender in the state instead gets their customers to write checks dated for the day the loan is given. Customers borrow money because they don’t have any, so the lender accepts the check knowing that it would bounce on the check’s date. If the borrower fails to pay on the due date, the lender sues the borrower for writing a hot check.
Now, we should say, that when you’re an academic studying a particular industry, often the only way to get the data is from the industry itself. It’s a common practice. But, as Zinman noted in his paper, as the researcher you draw the line at letting the industry or industry advocates influence the findings. But as our producer Christopher Werth learned, that doesn’t always seem to have been the case with payday-lending research and the Consumer Credit Research Foundation, or CCRF.
In US law, a payday lender can use only the same industry standard collection practices used to collect other debts, specifically standards listed under the Fair Debt Collection Practices Act (FDCPA). The FDCPA prohibits debt collectors from using abusive, unfair, and deceptive practices to collect from debtors. Such practices include calling before 8 o’clock in the morning or after 9 o’clock at night, or calling debtors at work.
Some of the lenders in our network participate in what is known as automatic loan renewal. Simply put, if your loan is beyond a specific amount of time past due, your lender will rollover your loan. This may be offered to you in addition to options like repaying your loan in full at a later date or repaying your debt in installments over time. The minimum term for an automatic renewal is 15 days and you will likely be required to pay renewal fees and additional interest charges.
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DUBNER:OK, so this is interesting that a watchdog group that will not reveal its funding is going after an industry for trying to influence academics that it’s funding. So should we assume that CFA, the watchdog, has some kind of horse in the payday race? Or do we just not know?
While the Trump rollback of the rule is an obvious direct attack on the regulation, it is predictable. Mulvaney—who received over $62,000 in political contributions from the payday-lending industry in past positions and whose appointment faces an ongoing legal challenge in court by his Obama-selected predecessor—raked in thousands in contributions just around the same time he issued a letter of protest to the Obama administration in 2016, warning that curbing payday lenders would unfairly limit “access to credit” for poor borrowers. He also opposed legislation to protect households at military bases from predatory lenders.
Many countries offer basic banking services through their postal systems. The United States Post Office Department offered such as service in the past. Called the United States Postal Savings System it was discontinued in 1967. In January 2014 the Office of the Inspector General of the United States Postal Service issued a white paper suggesting that the USPS could offer banking services, to include small dollar loans for under 30% APR. Support and criticism quickly followed; opponents of postal banking argued that as payday lenders would be forced out of business due to competition, the plan is nothing more than a scheme to support postal employees.
That makes plenty of sense in theory. Payday lending in its most unfettered form seems to be ideal for neither consumers nor lenders. As Luigi Zingales, a professor at the University of Chicago, told a group of finance professionals in a speech last year, “The efficient outcome cannot be achieved without mandatory regulation.” One controversy is whether the bureau, in its zeal to protect consumers, is going too far. Under the plan it is now considering, lenders would have to make sure that borrowers can repay their loans and cover other living expenses without extensive defaults or reborrowing. These actions would indeed seem to curtail the possibility of people falling into debt traps with payday lenders. But the industry argues that the rules would put it out of business. And while a self-serving howl of pain is precisely what you’d expect from any industry under government fire, this appears, based on the business model, to be true—not only would the regulations eliminate the very loans from which the industry makes its money, but they would also introduce significant new underwriting expenses on every loan.
Because lenders do not typically run a credit check during the application process, the process of requesting a payday loan does not have an effect on your credit score. Instead, they inquire about your current employment status and source of income. Lenders also mandate that you submit a post-dated check to cover the amount of the loan once funds from your employer are disbursed into your account on payday.
Other options are available to most payday loan customers. These include pawnbrokers, credit union loans with lower interest and more stringent terms which take longer to gain approval, employee access to earned but unpaid wages, credit payment plans, paycheck cash advances from employers (“advance on salary”), auto pawn loans, bank overdraft protection, cash advances from credit cards, emergency community assistance plans, small consumer loans, installment loans and direct loans from family or friends. The Pew Charitable Trusts found in 2013 their study on the ways in which users pay off payday loans that borrowers often took a payday loan to avoid one of these alternatives, only to turn to one of them to pay off the payday loan.
MCKAMEY: I got like $200 and it was just like I needed some real quick cash. There wasn’t no hesitations, no nothing. They asked me for certain pieces of information. I provided the information, and I got my loan.
Contact your state’s regulator or attorney general office for more information. You may also contact a legal aid attorney or private attorney for assistance. You can submit a complaint about payday loans with the CFPB online or by calling (855) 411-2372.
Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.
Which suggests there is a small but substantial group of people who are so financially desperate and/or financially illiterate that they can probably get into big trouble with a financial instrument like a payday loan.
WINCY COLLINS: I advise everyone, “Do not even mess with those people. They are rip-offs.” I wouldn’t dare go back again. I don’t even like walking across the street past it. That’s just how pissed I was, and so hurt.
WERTH: I was, and what he told me was that even though Hilary Miller was making substantial changes to the paper, CCRF did not exercise editorial control. That is, he says, he still had complete academic freedom to accept or reject Miller’s changes. Here’s Fusaro: