Consumer advocates welcomed new rules proposed by the federal government to rein in abuses in payday lending, a nearly $40 billion industry currently regulated by the states.
Regulations released June 2 by the Consumer Financial Protection Bureau, a five-year-old federal agency, would force lenders to determine if borrowers can repay their loans and make it harder to roll over loans, a practice that experts say often leads to cycles of recurring debt with interest rates annualized as high as 400 percent.
“This is the most important moment in the fight for just and fair lending,” said Stephen Reeves, who leads the advocacy efforts for the Cooperative Baptist Fellowship. “The proposed rule released today will go a long way to insuring that those who offer small loans are not basing their profits on a cycle of debt they intentionally create.”
Payday and auto title loans are marketed as a resource for people who live paycheck-to-paycheck and need access to credit in an emergency. A study by Bankrate.com last year found that 63 percent of Americans say they cannot afford an unexpected expense like a $500 car repair or a $1,000 visit to an emergency room.
Industry critics say the business model preys on financially vulnerable consumers who get loans out of desperation and must repay them by taking out subsequent loans in what becomes an ongoing “debt trap” compounding from paycheck to paycheck.
“Some payday lending is actually predatory lending,” said Eric LeCompte, executive director of the religious anti-poverty coalition Jubilee USA. “Predatory practices must be discouraged.”
Other consumer, faith and civil rights leaders said the Consumer Financial Protection Bureau is on the right track, but loopholes and exemptions remain that need to be addressed during an open comment period ending Sept. 14 before the regulations are finalized.
“The devil, as always, is in the details,” said Mike Calhoun, president of the Center for Responsible Lending. “There is still a great deal of work to be done on this proposal to ensure it truly protects consumers from the devastation wrought by high-cost, low-dollar predatory loan products.”
Reeves encouraged the many pastors and church members in the CBF who have been working for years for payday-lending reform to take advantage of the opportunity to comment on the CFPB proposal.
“The public comment period is an extremely important opportunity for Cooperative Baptists and all people of faith to raise our collective voices to counter the well-funded payday industry megaphone and demand that strong rules are finalized as well as enforced,” Reeves said.