Key Takeaways

Payday loans are a type of short-term borrowing where a lender will extend high-interest credit based on a borrower’s income and credit profile.
Payday lenders trap their customers in an unending cycle of debt. Several studies have found that payday lenders are more likely to locate in neighborhoods with disproportionately large Hispanic and/or black populations
The Annual Percentage Rate on a two-week loan could be over 400%.
Research overwhelmingly shows that payday loans trap individuals and families in debt under the guise of providing “access to credit” and “consumer choice.”
The Consumer Financial Protection Bureau or (CFP) was created to protect us from these types of predatory loans but evidently hasn’t done a good job. You can thank the Trump administration for that.
Payday loans are a debt trap, plain and simple. If you are having trouble paying your bills, avoid payday loans, and seek out alternatives, such as loans from credit unions or from friends and family

Siphoning money out of poor communities and communities of color takes a serious toll on the economy. Money that could be spent building up local businesses or investing in communities is instead directed to neverending fees. For people who find themselves in desperate or emergency situations, a payday loan can seem like a lifesaver. The reality is that these lenders trap their customers in an unending cycle of debt.

Several studies have found that payday lenders are indeed more likely to locate in neighborhoods with disproportionately large Hispanic and/or black populations. 75 percent of the fees collected by payday lenders are from borrowers who have taken out 10 loans or more a year. Further, more than 80 percent of payday loans are rolled over or renewed within two weeks

What are payday loans?

Payday loans are a type of short-term borrowing where a lender will extend high-interest credit based on a borrower’s income and credit profile. A payday loan’s principal is typically a portion of a borrower’s next paycheck. These loans charge high-interest rates for short-term immediate credit. Essentially these are loan sharks that are legally allowed to operate. These loans are also called cash advance loans or check advance loans.

How Payday loans are structured

The loans can trap customers in debt because of their high-interest rates and fees. To borrow $100, consumers might pay $15 or $20 in interest, amounting to annual percentage rates of well over 300 percent. Roughly 12 million Americans take out payday loans annually, racking up as much as $9 billion in loan fees. In 2014, the CFPB agency (Which I’ll go over what they do later in the episode) found that more than 80 percent of payday loans are rolled over or followed by another loan within 14 days, creating a “debt trap” for vulnerable consumers.
Compared to a mortgage, payday loans are pretty simple. Applicants must provide lenders with a bank statement and proof of employment, such as a pay stub, and the lender may check the applicant’s credit score on Teletrack, the payday lenders’ credit bureau. If the applicant checks out, he or she writes the lender a postdated (until payday) personal check, and the lender hands the borrower cash in exchange.

Loans range from $50 to $1000, but the typical loan is $300. The loan is due on the borrower’s payday, although borrowers can (and many do) roll over the loans. Payday lenders typically charge about $15 per $100 borrowed. At that price, the APR (Annual Percentage Rate) on a two-week loan is 390 percent. I know what you’re thinking. That’s almost 400% interest, is that even legal? Yup absurdly enough it is and why is beyond me, there has been research done from time to time exposing the predatory and disgusting practices these agencies implement, and yet it’s still something that’s debated by politicians.

Payday loans during the pandemic

During the pandemic, payday lenders see the chaos and crisis as a profit opportunity, because let’s be real that’s just what they do, they prey on people that need money the most. In many states, payday lenders were working to be declared essential businesses so that they could continue to prey on families even as financial insecurity increased. These loans that trap people in a cycle of debt are never essential–and in a crisis, they are even more harmful.

Effects on communities of color

For communities of color, the harms of payday lending run deep, exacerbating the persistent and growing racial wealth gap. Payday storefronts are significantly more likely to locate in communities of color, even when controlling for income. Payday lenders market their products as quick, easy, and short-term. But the research overwhelmingly shows that payday loans trap individuals and families in debt under the guise of providing “access to credit” and “consumer choice.”

Four out of five payday loans are taken out to repay an existing unaffordable payday loan, while the borrower is stuck in a 300%+ interest debt trap. These loans do not represent meaningful access to credit, but a systematic drain on consumers’ hard-earned income.

The average American family has yet to fully recover from the 2008 Great Recession. This is most true for families of color and older Americans. As a result, many lack a financial backstop to handle this downturn. Just as in 2008, low-wage workers and communities of color will disproportionately bear the brunt of this economic downturn. They are less likely to have paid sick leave or health insurance, less likely to work remotely, and more likely to come in direct contact with others as they have little choice but to continue working during this crisis. This leaves them more vulnerable than ever to predatory lending. Without protections, payday lenders will siphon away the stimulus income assistance, unemployment insurance benefits, and declining wages of these already struggling workers.

The Consumer Financial Protection Bureau (CFPB)

There is a federal agency that was created to protect us from these raptors. It was first proposed in 2007 by Warren (who was then a Harvard University law professor) and passed as part of the 2010 Dodd-Frank Act during the Obama administration in response to the 2008 Great Recession.

In a 2015 speech, President Barack Obama proposed a new rule the CFPB was to enforce to better protect consumers from “getting stuck into … cycles of debt.” He warned the industry that outlets making their profits that way would have to “find a new business model.” The rule was to take effect in January 2018, but it was delayed by the CFPB’s then-acting director, Mick Mulvaney ― who, as a Republican House member from South Carolina, took campaign donations from the industry and tried to do away with the agency. And last December, CFPB Director Kathy Kraninger announced the regulation would not take effect in order to “encourage competition in the payday lending industry.”

When the coronavirus pandemic struck in March, it sent shock waves throughout the economy. Amid lockdowns and stay-at-home orders, thousands of small businesses shuttered, while larger companies laid off millions of workers. Evidence of the economic devastation soon began surfacing in a small but important corner of the federal bureaucracy

The Consumer Financial Protection Bureau (CFPB), which has seen consumer complaints about overaggressive debt collectors, inaccurate credit reports, and mortgage problems rise since January, reaching more than 8,000 by May. The Bureau Director Kathy Kraninger, which of no surprise was chosen by trump “has done next to nothing of substance” about the pandemic. Instead of implementing the original protections last year, the CFPB threw out five years of careful research

Liberals view the agency’s core mission as protecting consumers against a sometimes greedy financial industry. Conservatives say the CFPB has too much power and lacks accountability, and that its regulatory efforts actually hurt consumers by limiting their ability to get financial help ( In my opinion these type of loans should be limited and the interest rates capped because the last thing consumers need is to take out one of these 300%+ interest rate loans during a pandemic which as I’ve mentioned purposefully target lower-income families and minorities by opening stores in their neighborhood and taking advantage of their situation to only drown them in more debt through insanely high-interest rates and confusing terms).

This debate became even more heated during the Trump administration. Under the leadership of Mick Mulvaney, a fierce agency critic, and then Kathy Kraninger, the CFPB actually scaled back its activities, paused pending enforcement and rule-making efforts, and cut its own budget.

You wanna know what Kathy did to protect consumers and minorities during the pandemic? Nothing. She instead focused the consumer bureau on weakening critical consumer protections, relaxing enforcement against financial institutions, and undermining the agency from the inside. During the pandemic, she loosened the requirements of a rule regulating payday loans in response to financial industry concerns. Hmm, I thought this agency was called the CONSUMER financial protection Bureau not the FINANCIAL SECTOR PROTECTION BUREAU. Kathy’s defense was that the bureau is trying to ensure that cash-poor consumers still have access to emergency loans during a recession. If that was the case then she wouldn’t have loosened up regulations for these loan sharks and instead implemented a cap on their interest loans of I’d say 30% but that’s just my opinion.

CFPB Covid response

All the CFPB did was create websites and blogs that have material for us to read on how to avoid potential scams related to the virus, and debt collection activities, and such. This is fine and all but these efforts in my opinion have fallen short. There are millions of workers unemployed and millions of families struggling to pay their mortgage or rent. The bureau needs to take a leadership role in shielding consumers from as much economic harm as possible instead of just giving us some reading material in which those that actually need it can’t even access because they don’t have enough to pay for their internet bill.

Consumer advocates and others expect the bureau to become more aggressive with President-elect Joe Biden, who has pledged to hold financial institutions accountable.

Conclusion

Now that we’re in the middle of an economic crisis, millions of Americans and especially immigrants and minorities are vulnerable to predatory loans that will make a terrible situation worse. Payday loans are a debt trap, plain and simple. If you are having trouble paying your bills, avoid payday loans, and seek out alternatives, such as loans from credit unions or from friends and family. Reach out to each company or person you owe money to and explain that you need help because of the coronavirus. Doing so might help you delay or reduce your monthly payments, or avoid interest and late fees.

“Consumers deserve protection from debt trap loans. The CFPB’s wrongheaded action makes it all the more urgent that Congress immediately pass H.R.5050, which is a bipartisan bill to cap interest rates on predatory loans at 36 percent.” This protects consumers from harmful outcomes, such as bankruptcy and overdraft fees, during uncertain economic times. It also guards against unfair rates and prevents the current public health crisis from driving consumers into a long-term cycle of debt. All lenders, including depository institutions, should only issue loans that are underwritten and affordably priced at no higher than 36% annual interest for small loans, and at lower rates for larger loans.

During this widespread financial crisis, high-cost, short-term, and/or unaffordable loans should not be considered “essential” or any part of an appropriate “emergency” response. Far from replacing lost income, high-cost debt traps will bury consumers in interest and fees, making it harder for consumers and the economy to get back to normal.
Congress must act to protect consumers and small businesses from high-cost predatory loans during this national emergency especially when they are specifically targeted towards minorities and those in need.

Let me know your thoughts on Instagram @latinamericaneo What are your thoughts on the CFPB? Do you think they have too much power?

Facts

African-American neighborhoods have three times as many stores per capita as white neighborhoods. This disparity increases as the proportion of African-Americans in a neighborhood increases.
Payday Lenders are focusing their marketing on young people and taking advantage of their use of technology to increase the likelihood that they will use their services.
67 percent of Latinos support the Consumer Financial Protection Bureau’s proposed rule to regulate payday lending.
74 percent of Latinos say that passing additional regulation of the payday lending industry is important to them.
Nationally, there are more payday lending storefronts than there are McDonald’s or Starbucks franchises.