In 2007, then-Professor Elizabeth Warren reminded us that “it is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house.” But as she noted, it’s entirely possible to buy a financial product with the same odds of causing financial ruin—payday and car title loans can come with annual interest rates of 300 percent or more, leaving many borrowers worse off than before.
Today, the Consumer Financial Protection Bureau (CFPB) released new regulations to help take these harmful financial products off the shelf. This rule is expected to help struggling families avoid $8 billion in fees from predatory lenders each year. And yet, it faces an uphill battle—the CFPB will need not only public support for its rule to come to fruition, but also for Congress not to sabotage its efforts and for state legislatures to help push it to the finish line.
These reforms are sorely needed, as payday and title lending turn a profit on the backs of cash-strapped families. In exchange for access to someone’s bank account or a spare set of keys to their car, these lenders typically offer quick cash—anywhere from a few hundred dollars to a few thousand—expecting it to be paid back either from the next paycheck or within the next month.
But, many borrowers can’t afford to pay back the loan at the next payday or the end of the month. Instead, 4 out of 5 borrowers have to roll over that loan, or take out another one to pay back the first. The result is that interest and fees pile up, and borrowers are unable to pay down the initial loan even. This can lead to enormous economic hardship. As St. Louis resident Naya Burks found after borrowing $1,000, her loan became a $40,000 debt through interest, fees, and a lawsuit. And as the CFPB’s own research has shown, 1 in 5 car title borrowers lose the car to repossession.
It’s no wonder, then, that faith leaders from all different traditions have spoken out against these loans. The states have taken action as well. As many as 14 states and the District of Columbia have instituted interest rate caps of 36 percent or less to ban these loans. Indeed, in Arkansas, where the state Constitution now puts a ceiling on interest rates, only 12 percent of former borrowers said that they were worse off as a result.
Unfortunately, many members of Congress seem to have missed the memo that these are toxic products that do more harm than good. Florida’s Congressional delegation, among others, has tried to block the CFPB, arguing that the state already has the problem under control—even as lenders take $76 million a year out of the state’s economy. And just last year, Congress tried to weaken tough anti-predatory lending rules that protect service members and also considered hampering the CFPB’s ability to act independently.
The CFPB’s rule will rein in some of the worst practices in this industry. In many circumstances, it will require lenders to figure out whether the borrower is actually able to pay back a loan before making one in the first place. It will limit how many loans borrowers can take out, and when. And it will limit lenders’ ability to pickpocket by seizing funds from borrowers’ bank account over and over without consent.
These strong federal rules are also important because many states haven’t been able to address this problem on their own. Missouri has almost as many payday loan stores as grocery stores, with an an average interest rate on these loans of 444 percent. And in 2014, the Louisiana legislature couldn’t even pass a weak bill limiting payday loans to ten per year. That’s not to mention Ohio, where voters overwhelmingly supported a payday lending ban, but lenders rechartered themselves as mortgage companies through a legal loophole. But states still can take action to curb this abusive practice. They can follow the lead of New York, North Carolina, and others states by capping interest rates, an action of extra importance given that a loophole in Dodd-Frank blocks the CFPB from taking this action. And even states with strong laws on the books need to stand firm when tempted to adopt a looser standard.
Stopping the debt trap won’t happen in a day. But today, the CFPB takes a big step toward taking a toxic product off the shelves. Congress, and the nation, should take notice.