American banker recently posted a column defend payday loans. The author, Ronald Mann, opposes those who say that borrowers are “obliged” to take out another loan, arguing that the word is too strong. “Forced” is not too strong a word.
Payday lenders often take payments directly from a borrower’s checking account as soon as they are paid, so at the end of the month, most people cannot repay their loans and cover their normal living expenses. . They end up taking out loan after loan to cover the difference at the end of the month, falling into a cycle of rapidly declining debt.
Borrowers feel trapped as they are faced with two terrible choices: take out another bad loan because of the shortfall created by the first loan, or face a series of catastrophic consequences associated with default.
These predatory payday loans are deceptively marketed to cash-strapped borrowers as a quick solution to their financial problems. In my work representing the 38th Congressional District of California, I have seen the real impact these loans create on the men and women who work hard to make ends meet.
At a recent round table in my district, Davina Dora Esparza, a former payday loan borrower from east Los Angeles, told me, “I’ve been stuck in the payday loan debt trap for over three years and I have paid over $ 10,000 in fees on several payday loans. This experience created a lot of stress for me and I couldn’t find a way out. I ended up defaulting on my loans earlier this year, and will never go back. “
If we can look past the legal semantics, we can easily see that most payday loans, car titles, and installment loans are carefully designed to trap borrowers in debt and maximize profits. According to a defense ministry report, “The debt trap is the rule, not the exception.” CFPB’s own research found that over 75% of payday loan fees were generated by borrowers who took out more than 10 loans per year. And impartiality Center for responsible lending found that 76% of all payday loans are taken out within two weeks of a previous payday loan – this is a downward spiral of debt.
In response to these disturbing statistics, the Federal Bureau of Consumer Financial Protection is considering rules to reduce such abuses. Payday lenders set up a court press to prevent tough rules that would end the exploitation of borrowers.
As in many other financial transactions, there is a difference in the level of knowledge between the lender and the borrower. In mortgages, for example, there are firm rules that prevent lenders from signing borrowers on ruinous loans that they will not be able to repay. A “repayability” standard that confirms that payday loan borrowers can actually repay the loans they take out is quite reasonable consumer protection. It should be included in the CFPB rules as it will be much more difficult for lenders to trap borrowers in debt. I also hope the office will consider stopping the debt cycle by setting outer limits on how long people can be stuck in unaffordable debt, such as the 90-day FDIC guidelines.
The is a strong bipartite support to the CFPB to create consumer protections for payday loans. I am also convinced by what Davina told me. She said: “I hope the new CFPB rules prevent other people from going through what I have done.” This is also my hope, and I hope CFPB pays attention to the real world experiences of people like Davina.
Linda Sánchez, a Democrat, represents the 38th District of California in the United States House of Representatives. She sits on the House Ways and Means Committee.