18 Feb Payday lending: The lie that binds
Reilly Morse
The Consumer Financial Protection Bureau’s imminent reform of the payday lending industry is welcome news for millions of families burdened by the industry’s exploitative practices in my home state of Mississippi and across the country.
Payday lenders have caused more than their share of misery in Mississippi. At a time when payday lenders vie with fast-food restaurants for dominance of the urban and suburban landscape, we stand out for having the highest concentration of such lenders in the nation. We also have among the highest interest rates, often topping more than 500 percent.
The federal government has an important role to play here because while Congress and some states have taken action to regulate payday lending, the industry has deep pockets to fight effective new laws. When Congress put a cap on predatory loans to military families in 2006, payday lenders found loopholes in it and Congress has not broadened those protections since. Meanwhile, payday lenders have done a great job influencing lawmakers in Mississippi. All of which makes CFPB action urgent and appropriate.
Here in Mississippi the legislature made great show of trying to regulate the industry by amending the governing law in 2011, which established two tiers of loans. The first tier, applying to loans of $250 or less, let lenders require repayment within 14 days. The second, applying to loans that when combined with fees do not exceed $500, let lenders require repayment within 30 days. No sooner did the law go into effect than the industry found a way to circumvent it: by issuing multiple first-tier loans at once to a single borrower. Efforts to close that loophole died in the state legislature just last week. While legislative leaders have acknowledged that this loophole should be fixed, they have stated that they prefer to wait for the CFPB’s new rules on payday lending.
These kinds of loopholes come with harsh, real-life impacts on families. Nearly 60 percent of payday loans in Mississippi are taken out by women, most of whom are single heads of households struggling to provide for themselves and their children. They often can’t pay the full amount of the loan back when it comes due, so they are forced to take out a second loan with additional fees, creating a cycle of debt with an iron-hard grip. These loans become another monthly bill for families whose budgets are already strapped. This is destabilizing for parents and children alike.
Payday lenders in Mississippi follow a playbook familiar to states across the country-setting up shop in strip malls near military bases and in vulnerable parts of town, luring families with quick, small dollar loans that come with risky, sometimes devastating, strings attached.
Americans striving for greater economic security need better ways to access loans in a pinch. Federal researchers, consumer advocates, faith leaders, and supporters of veterans all agree.
To be effective, the CFBP’s promised regulations must set the standards for an industry that plays fast and loose with the law. It should foster lending programs that address the needs of families, providing them with more time to pay back loans and lower fees so that loans can actually be useful in times of financial distress. A 36 percent interest rate cap, the same rate that applies to banks and credit unions, would be a good start. (Lobbyists aggressively blocked a similar cap in Mississippi.)
As we wait for federal attention to this national problem, community organizations in places like Mississippi are taking action to develop alternatives for low-income families, even in the face of loopholes and aggressive lobbies.
Here at the Mississippi Center for Justice, we worked with financial institutions and employers to establish New Roots Credit Partnership, an alternative to payday lending. This program creates a path toward financial security and independence for some of Mississippi’s most vulnerable. Under these partnerships, people can get small loans with reasonable repayment plans at interest rates as low as five percent. These fair policies are a light in the darkness for families who would normally know of no option beyond payday lenders. The working poor don’t have to be vulnerable to unscrupulous lenders. New Roots helps them find options to usurious loans and empowerment for the hard work they do.
The curtain has been pulled aside on the payday lending industry. We all see it for what it is. It’s past time to hold these practitioners accountable. The CFPB should act decisively in the coming days to provide much needed protection for the industry’s victims. Our working families can’t afford to keep waiting. They have been at risk long enough.
Reilly Morse is president of the Mississippi Center for Justice.