The Consumer Financial Protection Bureau held a hearing Thursday in Kansas City to discuss the payday loan industry, and bureau director Richard Cordray announced proposed reforms designed to protect consumers from loans that he said become “debt traps.”
While Cordray’s agency doesn’t have the authority to establish usury caps on these loans, he said it has authority “to clean up unfair, deceptive, or abusive practices.”
“Something needs to change,” Cordray said.
He said that in recent years his organization has held field hearings and public forums across the U.S. about payday lending. Payday loans are short-term advances, typically for $500 or less, and they often carry annual percentage rates as high as 400 percent, according to the consumer bureau.
“We’ve heard searing experiences of how people are affected by payday lending,” Cordray said. “It undermines financial life in their communities.”
Cordray said that there are roughly 16,000 payday loan stores operating in the 36 states where they are permitted and the number of online vendors continues to grow. He said the new guidelines would require short-term loan companies to apply principles used by traditional banks and credit unions.
These guidelines would include capping the number of loans a lender can give a borrower in quick succession, capping interest rates on short-term loans, and requiring lenders to notify borrowers when debiting bank accounts for loan payments.
The proposal would also require lenders to first make sure a potential borrower could repay a loan efficiently and still afford basic living expenses, based on the person’s income and borrowing history.
“We believe the vast majority of borrowers would still be able to get the credit they need, but now shielded by an umbrella of stronger protections that would keep them from getting into debt they cannot afford,” Cordray said.
A call for safety and responsibility
Before Cordray’s announcement, Kansas City Mayor Sly James began the discussion with remarks on the “predatory” tactics used by short-term loan companies. James said that the state of Missouri currently has more payday loan storefronts than it has McDonald’s, Walmart, and Starbucks locations combined.
James said that payday loan companies prey on the most vulnerable borrowers and trap them in an endless cycle of trying to repay loans with high interest rates.
“This cycle helps keep the poor poor,” he said. “And it robs this city, state and country of the potential contributions these people could make if they had other options.”
“Payday lenders aren’t philanthropists,” James said. “They’re motivated by profits, not people.”
He emphasized that he had no problem with lenders making a profit, but that the “triple-digit interest rates” of some payday loan companies are “by no means legitimate.” James added that the consumer bureau alone cannot solve Missouri’s payday loan problem.
“The state legislature has some responsibility to do something about it,” he said.
Opponents of the proposal
The hearing’s eight panelists were divided on the issue. Darrin Andersen, president and CEO of Overland Park, Kan.-based payday loan company QC Holdings, Inc., said the proposed rules would eliminate many short-term loan vendors and would force borrowers to seek unsafe lending sources.
“We’ve heard horror stories in the media about unlicensed and illegal vendors,” Andersen said, adding he felt it was unfair to compare these companies to those that employ responsible lending practices.
Andersen said the consumer bureau’s proposal failed to answer what alternatives the short-term loan industry would have if the rules “regulated them out of business.”
Bill Himpler, executive vice president of the American Financial Services Association, a credit industry trade group, said that the proposed rules could hamper lenders’ ability to provide short-term loans for those in need. He echoed Andersen’s sentiment that customers will turn to “worse means.”
“We need greater flexibility in meeting these requirements,” Himpler said.
Supporting greater regulations
The Rev. Cassandra Gould serves as director of Missouri Faith Voices, a network of pastors and other faith leaders who advocate for social issues. She spoke in support of the consumer bureau’s proposal, saying the payday loan industry disproportionately targets communities of color, older Americans and people living in poverty.
Before entering ministry, Gould worked for 17 years in the banking industry and said she was surprised to learn about short-term loan practices.
“To get a payday loan all you needed was a checking account and to be breathing,” she said. “There were really no other requirements.
“Because of that, many American citizens have found themselves in the debt trap.”
Gould said that payday lending in America is “part of an unholy trinity – poverty, financial predation and poor health.”
Fourteen states, along with the District of Columbia, prohibit payday loan storefronts. Kerry Smith, an attorney with Community Legal Services of Philadelphia, said that the absence of these stores in Pennsylvania has helped protect borrowers and that the consumer bureau’s proposal should aid states with regulations already in place.
Smith said that payday loan stores are notorious for their harmful practices. “Their product is the financial equivalent of quicksand,” she said.
The hearing concluded with an opportunity for the public to voice concerns about both the proposal and the industry.