Payday Loans Touted As “Crucial” During the COVID Crisis. They Shouldn’t Be.
May 10, 2020
As Americans reel from the economic impacts of the COVID-19 crisis, payday loans are making a comeback. The loans, typically for amounts under $500, come with fees that result in huge effective interest rates and are available to borrowers with bad or nonexistent credit history – often marketed specifically towards low-income households. They are offered as an emergency line of credit to help tide people over until their next paycheck, but are often responsible for trapping customers into an unsustainable cycle of debt.
Payday lenders are now going out of their way to make their products more available even at the expense of public health. Some states have specifically carved out payday lenders as “essential business” – allowing them to remain open as other business shutter. In at least one striking case, Cash Store – a payday lender with over 100 locations in Illinois, Michigan, New Mexico, and Wisconsin – is defying certain state shutdown orders to remain open and collect on debts, even as their services are available online and and state guidelines do not deem the chain to be essential.
Without acknowledging the irony, the industry is now pursuing hyper-low interest, forgivable loans through the SBA’s Paycheck Protection Program. California-based Payday Money Centers has filed a lawsuit in federal court alleging that payday lenders are unfairly excluded from the SBA’s loans.
The industry’s lobbyists are hard at work making their case. A bipartisan group of 28 House lawmakers wrote a letter dated April 23rd to Steve Mnuchin and Treasury Jovita Carranza, administrator of the SBA, requesting that “small-size nonbanks” including payday lenders gain access to the PPP funds. It’s worth noting that the representatives who signed the letter receive over six times more campaign donations on average from payday lenders than non-signers.
All this as reports surface that political appointees at the Consumer Financial Protection Bureau have been “manipulating the agency’s research process” in efforts to repeal a 2017 rule – finalized under Obama-appointed Director Richard Cordray – that would have strictly limited payday lending to individuals who are unable to afford the loans.
The industry is pushing on all fronts to increase business as the economy crumbles. “They’re moving quickly to establish this rule because they think they can take advantage of the time we don’t have to focus on them right now,” said California Representative Maxine Waters referring to the CFPB rule change as quoted in the New York Times report. And given the sympathetic ears of the Trump administration officials, they may be right.
All this as more Americans are in genuine need for access to emergency funds and credit. Though experts are in agreement: payday loans are typically the worst of all available options to those in need of credit. Absent being able to rely on friends and family, seeking a personal loan through a bank or credit union, utilizing credit cards, or accessing a credit counseling service to reduce monthly debt liabilities – while all still carrying some risk, are generally better options for consumers.
With consumer-interest advocacy lacking at the federal level, state and local governments, as well as community organizations, must do all they can to direct those in need of emergency funds to sources that will not saddle borrowers with a burden of debt they cannot climb out of once the crisis passes. Most borrowers of payday loans are unaware the vast majority of those who use the services are most often stuck in a cycle of incurring new debt to pay off past loans.
The government can and must do better. Many states have taken firm action in the past ten years, limiting the scope and abuse of payday lending. Their efforts have paid off, with payday lending severely limited in regulated states – though the battle continues in state houses around the country. For now, absent more responsible federal intervention, state and local governments should ensure responsible limitations on how payday lenders can operate in their communities, requiring protections for those most vulnerable to the cycle of debt.
And in the long-term, new solutions must be presented for how Americans can access emergency credit when needed without risking their financial future. Small reforms such as limiting payments to a percent of the borrowers’ income, requiring clear disclosure of total costs including the effective annual percentage rate of the loans, setting maximum allowable charges or fees, and cracking down on harmful collections processes are all positive steps in reforming the industry. And big ideas, such as Senator Elizabeth Warren’s proposal to institute banking services at post offices that could replace the need for for-profit payday lenders deserve discussion.
This is an unprecedented time of economic hardship for Americans, those that are financially insecure deserve to know their government is on their side in protecting the vulnerable from usury and unsustainable debt. We must do all we can to ensure those that need emergency funds and credit have access without risking their financial future. And we must keep a close eye on an industry that has shown little hesitation to work the levers of power in order to bring in ever greater profits during this time of crisis.
Nolan DiFrancesco, Project Manager for Research and Reporting at Global Thinking Foundation USA