Payday lenders as modern-day loan sharks and the fight by people of faith to #StopTheDebtTrap
October 24, 2016 by 0 Comments
By Stephen K. Reeves
Throughout
most of our history, payday and auto-title lenders were called loan
sharks and were operating on the wrong side of the law. Such exploitation of the vulnerable was understood as immoral and considered far outside legitimate business practices.
Only since the 1990s have these predatory lenders found ways to evade or amend state usury laws and offer loans at rates of 400% APR and above. During this period, the industry has ballooned to become a multi-billion-dollar a year business with more than 16,000 storefronts nationwide.
But for as long as these institutions have been in operation, in states across the country, people of faith and community activists have been raising the alarm, calling for reform and seeking a return to traditional usury laws.
Perhaps no other issue today epitomizes both the worst and best of our current political system.
According to countless observers, studies and reports, this industry is not built upon expensive, emergency small-dollar, short-term loans given to risky borrowers. Instead, the heart of the payday business model is creating intentional debt-traps which profit most when their customers fail.
A large percentage of borrowers end up in a cycle of debt by paying fees and interest that only buys more time to pay a lump sum, never reducing what they owe. Others pay off the loan only to realize the resulting hole in their budget leaves it impossible to make it to the next payday without another loan.
In fact, according to a nationwide study of 15 million transactions by the Consumer Financial Protection Bureau, 75% of all fees generated from these loans come from the 45% of borrowers who end up in 11 or more loans in a 12 month period.
Lenders and the elected officials that defend these practices represent the worst of our current political climate. They often point out that borrowers sign a contract so lenders are due whatever fees and interest rate has been agreed to. By not considering the undue leverage a lender has over a desperate borrower, such a position declares the free market as the ultimate arbiter of morality.
This unrestrained capitalism — unencumbered by moral considerations — inevitably leads to a number of unacceptable results; child labor being a prime example. Similar thinking on Wall Street led to the Great Recession of 2008.
The payday lending industry takes advantage of fellow citizens by setting up a system where borrower failure leads to lender success and profit. Neighbors at the end of their rope are nothing more that potential profit.
Add on top of that the corrupting influence of industry money and it is a perfect demonstration of the worst in our political system. Generous political contributions — to politicians from both parties — and millions of dollars spent on lobbyists at the state and national levels often effectively overwhelm the voice of those calling for reform and borrowers who are already politically marginalized.
In another sense, the fight to reform this industry represents the best of our political potential.
Champions for change, particularly at the state level, have shown incredible and rare bipartisan cooperation. This has been the case in Alabama, Kentucky and Arizona, among others. In Texas, ultra-conservative Tom Craddick, the Republican former Speaker of the House from Midland, teamed up with liberal heroine, former Senator Wendy Davis to push for reform.
Ten years ago, in our nation’s capital, the bipartisan Military Lending Act (MLA) was signed into law by President George W. Bush. The MLA limited the interest rate for payday and auto-title loans to 36% APR to active duty members of the military and their families.
Reform efforts at the state and federal levels have resulted in broad coalitions spanning typical ideological and theological lines. These have included not only consumer rights, legal aid and civil rights groups, but social service providers and a broad swath of the faith community.
In 2015, a new coalition called Faith for Just Lending was launched to support national reform, with a large and diverse list of members including the Cooperative Baptist Fellowship, The Ethics and Religious Liberty Commission of the Southern Baptist Convention, U.S. Conference of Catholic Bishops, National Association of Evangelicals, PICO and the National Baptist Convention, USA, among others.
Banding together to oppose exploitation of the financially vulnerable certainly represents the best of what active and faithful public witness can look like.
When reform efforts have failed in state legislatures, advocates have turned to creative political solutions. In some places, including Texas, this has meant passing local ordinances at the city level. This fight, and the central role people of faith played in it, is on display in the excellent new documentary titled “The Ordinance.”
At the federal level the fight for fair and responsible lending practices led to the passage of Dodd-Frank and the creation of the Consumer Financial Protections Bureau (CFPB). This new, independent consumer watchdog — insulated from many of the corrupting elements of the campaign and lobby dollars — was given specific authority to reign in the abuses of payday and auto title lenders, and they’ve proposed a new rule to do just that.
The aim of the rule is to insure lenders are not setting borrowers up to fail and instead are making efforts to assess a borrower’s ability to repay without getting caught paying endless fees to extend the loan, or falling into an trap of repeated loans.
While the proposal goes a long way to improving the situation for borrowers in states with lax laws, for advocates working for decades for reform the rule is not strong enough.
During the recent public comment period that concluded October 7, it is estimated that the CFPB received more than one million comments. Thousands of comments from people of faith all over the country and across the political and theological spectrum were among those voices speaking out.
While the work and debate on predatory lending and the ultimate fate of the CFPB continues, a united front of passionate faith leaders engaging in advocacy on behalf of some of the most financially vulnerable neighbors exemplifies a positive development in the midst of troubled times. By broadening the list of “moral” concerns and taking on some of the worst elements of the system, people of faith represent some of the best.
Stephen K. Reeves serves as the associate coordinator for partnerships and advocate for the Cooperative Baptist Fellowship. Learn more about CBF’s advocacy efforts at www.cbf.net/advocacy.
CBF is a Christian Network that helps people put their faith to practice through ministry efforts, global missions and a broad community of support. Learn more at www.cbf.net.
Stephen K. Reeves is the advocacy coordinator for the Cooperative Baptist Fellowship.
Only since the 1990s have these predatory lenders found ways to evade or amend state usury laws and offer loans at rates of 400% APR and above. During this period, the industry has ballooned to become a multi-billion-dollar a year business with more than 16,000 storefronts nationwide.
But for as long as these institutions have been in operation, in states across the country, people of faith and community activists have been raising the alarm, calling for reform and seeking a return to traditional usury laws.
Perhaps no other issue today epitomizes both the worst and best of our current political system.
According to countless observers, studies and reports, this industry is not built upon expensive, emergency small-dollar, short-term loans given to risky borrowers. Instead, the heart of the payday business model is creating intentional debt-traps which profit most when their customers fail.
A large percentage of borrowers end up in a cycle of debt by paying fees and interest that only buys more time to pay a lump sum, never reducing what they owe. Others pay off the loan only to realize the resulting hole in their budget leaves it impossible to make it to the next payday without another loan.
In fact, according to a nationwide study of 15 million transactions by the Consumer Financial Protection Bureau, 75% of all fees generated from these loans come from the 45% of borrowers who end up in 11 or more loans in a 12 month period.
Lenders and the elected officials that defend these practices represent the worst of our current political climate. They often point out that borrowers sign a contract so lenders are due whatever fees and interest rate has been agreed to. By not considering the undue leverage a lender has over a desperate borrower, such a position declares the free market as the ultimate arbiter of morality.
This unrestrained capitalism — unencumbered by moral considerations — inevitably leads to a number of unacceptable results; child labor being a prime example. Similar thinking on Wall Street led to the Great Recession of 2008.
The payday lending industry takes advantage of fellow citizens by setting up a system where borrower failure leads to lender success and profit. Neighbors at the end of their rope are nothing more that potential profit.
Add on top of that the corrupting influence of industry money and it is a perfect demonstration of the worst in our political system. Generous political contributions — to politicians from both parties — and millions of dollars spent on lobbyists at the state and national levels often effectively overwhelm the voice of those calling for reform and borrowers who are already politically marginalized.
In another sense, the fight to reform this industry represents the best of our political potential.
Champions for change, particularly at the state level, have shown incredible and rare bipartisan cooperation. This has been the case in Alabama, Kentucky and Arizona, among others. In Texas, ultra-conservative Tom Craddick, the Republican former Speaker of the House from Midland, teamed up with liberal heroine, former Senator Wendy Davis to push for reform.
Ten years ago, in our nation’s capital, the bipartisan Military Lending Act (MLA) was signed into law by President George W. Bush. The MLA limited the interest rate for payday and auto-title loans to 36% APR to active duty members of the military and their families.
Reform efforts at the state and federal levels have resulted in broad coalitions spanning typical ideological and theological lines. These have included not only consumer rights, legal aid and civil rights groups, but social service providers and a broad swath of the faith community.
In 2015, a new coalition called Faith for Just Lending was launched to support national reform, with a large and diverse list of members including the Cooperative Baptist Fellowship, The Ethics and Religious Liberty Commission of the Southern Baptist Convention, U.S. Conference of Catholic Bishops, National Association of Evangelicals, PICO and the National Baptist Convention, USA, among others.
Banding together to oppose exploitation of the financially vulnerable certainly represents the best of what active and faithful public witness can look like.
When reform efforts have failed in state legislatures, advocates have turned to creative political solutions. In some places, including Texas, this has meant passing local ordinances at the city level. This fight, and the central role people of faith played in it, is on display in the excellent new documentary titled “The Ordinance.”
At the federal level the fight for fair and responsible lending practices led to the passage of Dodd-Frank and the creation of the Consumer Financial Protections Bureau (CFPB). This new, independent consumer watchdog — insulated from many of the corrupting elements of the campaign and lobby dollars — was given specific authority to reign in the abuses of payday and auto title lenders, and they’ve proposed a new rule to do just that.
The aim of the rule is to insure lenders are not setting borrowers up to fail and instead are making efforts to assess a borrower’s ability to repay without getting caught paying endless fees to extend the loan, or falling into an trap of repeated loans.
While the proposal goes a long way to improving the situation for borrowers in states with lax laws, for advocates working for decades for reform the rule is not strong enough.
During the recent public comment period that concluded October 7, it is estimated that the CFPB received more than one million comments. Thousands of comments from people of faith all over the country and across the political and theological spectrum were among those voices speaking out.
While the work and debate on predatory lending and the ultimate fate of the CFPB continues, a united front of passionate faith leaders engaging in advocacy on behalf of some of the most financially vulnerable neighbors exemplifies a positive development in the midst of troubled times. By broadening the list of “moral” concerns and taking on some of the worst elements of the system, people of faith represent some of the best.
Stephen K. Reeves serves as the associate coordinator for partnerships and advocate for the Cooperative Baptist Fellowship. Learn more about CBF’s advocacy efforts at www.cbf.net/advocacy.
CBF is a Christian Network that helps people put their faith to practice through ministry efforts, global missions and a broad community of support. Learn more at www.cbf.net.
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