A Lifeboat In A Loan Shark-Infested Economy
Earlier this month, the Consumer Financial Protection Bureau revealed new rules to rein in payday lenders and their outrageous fees. Now, the CFPB needs to take the next step to protect Americans from these corporate loan sharks.
People’s Action is calling on the CFPB to take action. Sign the petition, and tell the CFPB to close the debt trap by only letting payday lenders make a loan when they are sure the borrower can afford to pay it back.
Once upon a time, when the financially desperate couldn’t get help from traditional sources and institutions — due to poor credit or lack of collateral — they sought out loan sharks; unlicensed lenders, who charged exorbitant fees, and charged penalties in the form of threats, intimidation, and broken bones. Like their oceangoing namesake, these predators relied on their innate ability to sense distress to find their prey, and showed little mercy to anyone they put the bite on. Usually connected to organized crime, they frequented the dark back alleys of finance.
Today, loan sharks have gone corporate, and they’re easy to find. They’ve gone legit, and set up storefronts in American neighborhoods across the country. In some neighborhoods, they’re more ubiquitous than banks. They’re called “payday lenders,” because they typically require borrowers to write a check dated for their next payday. The lender cashes the check on that payday, before the borrower can pay for necessities and other expenses. Payday loans cause about 50 percent of borrowers to be hit with overdraft fees, as a result of lenders’ automatic withdrawals; 42 percent had their accounts closed by their banks, when their payments failed due to lack of money in their accounts.
Corporate loan sharks still make their money the same way — by charging exorbitant interest rates and fees, that make debts quickly balloon out of control. According to the Stop the Debt Trap Campaign, the average payday loan carries an interest rate of over 300 percent. Borrowers can’t pay off their loans and cover regular living expenses. So they’re compelled to take out more loans, at high interest, or roll the initial loan over into a new one. Many end up using those additional loans to cover necessities like food and rent.
Some people call that a debt trap. Payday lenders call it a business model, but for those caught in the debt trap, it’s a a nightmare.
- Candice Bird took out a $500 payday loan in 2011, while working a sales job, to help cover a car payment. Halfway through the loan period, her lender suggested rolling her loan over into a new one. The second loan set off a two-year cycle of Byrd borrowing repeatedly to cover her mounting debt. Unable to pay her bills, she lost her car and her apartment. She only escaped by walking away from her last two loans, leaving her credit rating in shreds.
- When his wife fell and broke her ankle in 2003, Elliot Clarke knew his job as a security guard wouldn’t cover the bills. He turned to payday loans to make up the difference. In short order, a $2,500 loan ballooned to nearly $60,000 in interest. The cycle continued until he received disability payments from Veterans Affairs and Social Security, and was able to pay off the debt.
It makes sense that these loan sharks have multiplied. Like the sharks many of us will be watching on television this week, modern day corporate loan sharks tend to show up where there’s potential prey in distress. These days, there’s a lot of financial distress out there.
- According to the Federal Reserves “Report on the Economic Well-Being of U.S. Households in 2015,” nearly half of Americans — 46 percent — don’t have enough money to cover a $400 emergency expense. When asked how they would cover such an expense, 47 percent said they would either sell something or borrow, or just not cover the expense at all.
- According to an Associated Press/NORC Center for Public Affairs Research poll, 67 percent of Americans would have difficulty coming up with money to cover a $1,000 emergency expense.
In an economy where the “recovery” hasn’t trickled down to low-income Americans, and where many middle-class Americans are living paycheck-to-paycheck, that’s a lot of chum in the water. No wonder the loan sharks are everywhere.
The CFPB’s new rules are good first step against today’s loan sharks, but not enough to get everyone out of the water. We need more room in the lifeboat. Tell the CFPB to requires that payday lenders only make a loan once they determine a borrower can afford to pay it back.