Payday loans and potato chips
By Aaron Weaver
“Payday loans are the Lay’s potato chips of finance; you can’t have just one and they’re terrible for you.”
Comedian John Oliver dropped that line during a segment on his new show Last Week Tonight back in August. The HBO satirist delivered a humor-filled takedown of the $46 billion dollar industry that traps consumers in what Oliver called a “circle of misery.”
In Missouri, faith-based advocates have been working to end this circle of misery. Regulating an industry of this magnitude is no easy task and sometimes, as Missourians learned last year, “regulation” isn’t always real.
Missouri Governor Jay Nixon vetoed legislation in July to reform the payday lending industry in the Show Me State — legislation that consumer advocates had dubbed as “phony,” pointing out that the payday industry didn’t even bother to oppose the bill.
Annual rates on payday loans in Missouri can legally reach 1,950 percent, and the vetoed bill would have capped the annual rate at 912 percent on a two-week loan. It would have also forbid loan renewals and allowed borrowers struggling to repay their loan in full an extended payment period of two-to-four months.
Consumer advocates recognized this “reform” bill to be far from meaningful, noting that a borrower could use his or her next paycheck to pay off the loan and then turn around and take out another loan. Governor Nixon agreed.
“Missourians want meaningful payday lending reform, not a sham effort at reform that allows such predatory practices to continue,” Nixon said. “Supporters point to the prohibition on loan rollovers, but missing from the legislation is anything to address the unfortunately all-too-common situation where someone living paycheck to paycheck is offering multiple loans by multiple lenders at the same time or is encouraged to take out back-to-back loans from the same lender.”
Faith-based networks like Missouri Faith Voices, an initiative of the Kansas City-based Communities Creating Opportunity, have been advocating for real reform by way of a 36 percent rate cap on payday loans. Such a rate cap would restore families, communities and the economy, according to Faith Voices, which emphasizes that payday lenders target working class families as well as the state’s most vulnerable communities resulting in a draining effect on the economy.
“Our faith traditions are very clear: Exploiting the working poor is an abhorrent business model,” Lloyd Fields, a Baptist pastor in Kansas City, Mo. and CCO/Faith Voices leader, told me. “Payday lenders make their money by tricking and trapping their customers in endless cycles of debt. We cannot trust them to write their own reform, and our communities cannot afford the millions of dollars the industry drains from our local economies.”
Fields and other Missouri faith leaders plan to continue to advocate for payday reform during the state’s next legislative session. Meanwhile, advocates in other states are struggling with similar disappointments. Consumer groups in Louisiana tried to cap interest rates on payday loans at 36 percent during the 2014 legislative session. When that effort was thought unlikely to succeed, the proposed legislation was tweaked to limit consumers to take only 10 payday loans per year. That failed as well, and another reform effort is now unlikely for 2015.
“Legislators spoke loud and clear: They did not want to restrict these loans. I don’t agree with that decision,” Jan Moller of the Louisiana Budget Project told The Advocate. “Clearly, we tried as hard as we could to educate politicians about the destructiveness of these loans and how to protect consumers, but the industry prevailed.”
Consumer advocates, including a growing number of faith leaders, are now looking to Washington, D.C. for a federal solution to the nationwide problem of predatory lending. They are hopeful for help from the Consumer Financial Protection Bureau — a federal agency created in 2011 tasked with rooting out deceptive and abusive practices in the financial industry.
Less than four years old, the CFPB has already taken enforcement actions resulting in $4.6 billion in relief for 15 million consumers on the receiving end of illegal practices. The bureau has also set its sights on predatory payday lenders, most notably industry leaders Cash America International and ACE Cash Express. The CFPB fined the Fort Worth, Texas-based Cash America $5 million in November 2013 and required the payday company to issue $14 million in refunds to consumers due to its illegal practices. A settlement was announced in July with Irving, Texas-based ACE Cash Express agreeing to pay $10 million for its illegal debt collection practices.
The CFPB is expected to soon announce rules to regulate the 46-billion-dollar payday loan industry. While the bureau doesn’t have the authority to cap interest rates, advocates hope that these new rules will have teeth and limit the number of loans a person can take out in a year and require predatory lenders to verify borrowers’ income, expenses and credit history prior to making a loan.
Meanwhile, there is an effort in the 114th Congress to weaken the CFPB. Observers expect the bureau’s foes to use their subpoena powers to launch investigations that overwhelm the agency with document requests. On the first day of the new congressional session, Senator David Vitter (R-LA) introduced a bill to repeal the Dodd-Frank Wall Street Reform and Consumer Protection Act, the law which established the CFPB. Congressman Adrian Smith (R-NE) has also introduced a similar bill in the House of Representatives.
HBO funnyman John Oliver is right. Payday loans are terrible for you. They’re also terrible for local communities. And, according to one study, payday loans cost the slowly-recovering U.S. economy almost one billion dollars and over 14,000 jobs in 2011 — so they’re terrible for our nation too.
The momentum is building against predatory lending in many states and in countless communities across the country as a grassroots and bipartisan movement is growing. Yet, the question remains: Will our elected officials stand in the way of meaningful reform? Or, will they pitch in and finally do something about the predatory industry that traps thousands of Americans each year in a circle of misery?