A few years ago, Corri Varner of Savage, Minnesota needed a new pair of glasses so she could drive to her church. She was short on funds and went to a payday lender to borrow money to cover the cost. She was loaned the money, but it came with a steep fee and high interest rate. When her loan came due, she needed to take out a new loan to cover the previous loan, plus the fee and interest. Her new loan came with its own set of high fees and interest rate. Before she knew it, Corri was stuck in a “debt trap” – being forced to borrow each month to pay off the last month’s loan.
She isn’t alone. Each year millions of Americans get stuck in similar debt traps because of predatory payday lenders.
The good news is that earlier this year, the Consumer Financial Protection Bureau (CFPB) took a first step to crack down on lenders that make high interest, short-term loans. It has drafted new rules to make sure payday lenders don’t saddle consumers with excessive fees and outrageous interest rates. But the CFPB still has the opportunity to change its rules before they take effect, and I’m urging them to stand up for consumers by eliminating loopholes in their proposed rules and making sure the rules are as strong as possible.
According to the CFPB, 70% of borrowers of payday loans are forced to take out another loan when their first loan expires. And one in five borrowers are forced to repeat this cycle ten times or more. These debt traps can rob consumers through outrageously high charges – often with interest rates of more than 300% a year. And lenders sometimes cause consumers even more financial trouble by making repeated attempts to debit a customer’s bank account, even if there’s no money in it. That can put consumers on the hook for hundreds of dollars in overdraft fees.
The CFPB’s new rules would require a payday lender to verify that a customer actually has the ability to repay a loan before it’s issued. That means payday lenders have to check a consumer’s income, debt, and other data before making a loan, to ensure the customer has the resources to repay it. A family needs to put food on the table, pay rent, or make a car payment. And the rules will also prevent payday lenders from repeatedly debiting a customer’s account if the account doesn’t have any money in it. That means payday lenders won’t be able to run up overdraft fees as some have in the past.
While these rules will be good for consumers overall, it’s important to close loopholes that could undermine their effectiveness. For example, in some cases, under the CFPB’s proposed rules, payday lenders would be allowed to make up to six loans to a person without having to do a full review of the borrower’s ability to repay. In addition, the proposed rules wouldn’t apply to some longer-term loans either. So, I’ve been pushing the CFPB to close these two loopholes before the payday lending rules take effect.
In Congress, I’m also taking on abusive payday lenders. First, I’m fighting for legislation to cap the interest rates that payday lenders can charge. Instead of charging interest rates higher than 300% a year, I think we should set a national cap on how much lenders can charge, just like the 15 states that have already enacted interest rate caps of 36% or lower. And second, I’ve been pushing for legislation to crack down on online lenders that try to skirt U.S. laws by setting up their computers in foreign countries.
The new payday lending rules are an opportunity to secure a big step forward for this country’s working families. Although there’s more to do, we should be glad that for the first time, our country will soon have basic, national standards for payday lenders. It’s an important step to stopping the debt trap cycle that payday lenders have been forcing upon Americans.
This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.
Image: Zoran Zeremski
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