Payday Lenders Set the Debt Trap
The federal Consumer Financial Protection Bureau has already taken important steps to protect consumers in mortgage transactions and has established oversight of student loans, credit reporting agencies and debt collectors. Now the bureau is formulating rules to protect borrowers from unscrupulous payday lenders. The payday industry bills itself as a source of convenient, short-term loans, but the business model depends on trapping people into borrowing again and again, paying onerous fees as they go.
The bureau already has the authority to go after lenders that use abusive or deceptive tactics — as it did last week when it took action against ACE Cash Express, one of the largest payday lenders in the country. (The company offers loans in as many as 1,500 storefronts, located in 36 states and the District of Columbia.) The settlement requires ACE to pay $10 million in refunds and penalties and stop its illegal debt collection practices. By faulting the company for pushing people who could not repay their existing loans into taking out new ones — and paying new fees — the bureau is striking at the very heart of the exploitive payday lending model.
The coming rules will lay out specific lines of conduct for payday lenders and are likely to invalidate predatory practices that are now commonplace. In the case of ACE, the company actually trained its in-house debt collectors using a manual that explicitly instructed them to “create a sense of urgency” in borrowers who had exhausted the money they had been lent and who lacked the ability to repay. At that point, the manual said, the collectors were to offer the delinquent borrower the option of refinancing or extending the loan. Even after borrowers said they could not afford to repay, the company pressured them into taking on more debt. Every new loan meant the borrowers paid new fees.
As a way of closing the deal, the company used unlawful tactics like falsely threatening to sue or criminally prosecute, threatening to charge extra fees, harassing borrowers by phone, and sharing details of the debt with the customer’s employers and relatives. Under the settlement, ACE will end threats and harassment and will stop pushing debtors into new loans, in addition to paying $5 million in refunds and a $5 million penalty.
This is a sound result in one case, but the fact is that ACE’s practices appear to be typical in the industry. Earlier this year, for example, the bureau released a study of about 12 million payday loans issued across more than 30 states. It found that only 15 percent of borrowers could raise the money to repay the entire debt without borrowing again within 14 days. Twenty percent of these borrowers eventually defaulted, spelling disaster for their credit records. Nearly two thirds renewed a loan and were on the hook for fees that could put them on the road to financial ruin; three out of five payday loans were made to people whose loan fees exceeded the amount borrowed.
The bureau needs to be attacking the entire industry. The way to clean up this kind of fraud is to limit monthly loan payments to 5 percent of the borrower’s pretax income and spread the cost of fees and interest rates over the life of the loan. The bureau must also disallow abusive practices in which lenders get access to a borrower’s checking account, take out money and cause overdraft fees.
Staff Writer (2014 July 19) Payday Lenders Set the Debt Trap. Retrieved on July 20, 2014 from NYTimes.com