Payday loans have had a tremendous negative impact on the economic success of city residents – but cities can take action and make a positive impact at the federal level by showing public support for a proposed regulation.
In the United States, there are more payday lending storefronts than McDonalds and Starbucks combined. Many local leaders recognize that a high concentration of these types of businesses in a neighborhood can indicate residents may be financially insecure and lack access to less costly financial products through banks, credit unions and other mainstream financial institutions.
City leaders have worked at the local level to help protect their residents from this cycle of debt and encourage local credit unions, non-profits, and mainstream banks to get involved and increase financial stability within their communities. Local officials now have a federal ally in the Consumer Financial Protection Bureau (CFPB), with a proposed rule which has the potential to protect low-income consumers from protracted high-interest loan terms as well as reduce the amount of fees borrowers pay.
Payday and auto title loans are marketed to consumers as a bridge to help span shortages between paychecks or in the case of an emergency. However, these loans often become an endless highway with few exit ramps.
According to research conducted by the CFPB, these types of loans have a roughly 390 percent annual rate (APR). This can create debt traps in which four in five loans are re-borrowed within a month and an original loan term of 14 days can be stretched out over several months or years, resulting in hundreds, if not thousands, of dollars in interest and fees. Additionally, automated loan payments through the borrower’s checking account can create overdraft or failed transaction fees.
This cycle of debt increases the cost of access to a consumer’s own money, which can leave her unable to pay for food, housing, utilities or medication due to the automated loan payment. Also, residents caught in this debt trap cannot save for an emergency or longer term goals such as homeownership or education. Those who default on auto title loans risk losing their vehicle – likely their transportation to work – dramatically increasing a household’s financial instability. High interest rates associated with these loans are a financial drain on vulnerable families as well as drain the local economy as households cut back spending. Additionally, this financial strain on families can create issues for cities such as increases in homelessness and unemployment. Financial insecurity in residents also increases dependence on public resources already strained by existing demand.
Cities Can Take Action
Some cities have passed local legislation to curb payday lending. For example, San Antonio, Texas, passed an ordinance in 2012 addressing the registration and oversight of credit access businesses (CAB) that provide payday and auto-title loans and permitted the city’s Department of Finance to administer CABs. The limits and registration of businesses in San Antonio enables the city to prosecute predatory lenders who violate the ordinance’s limits on loan amounts, installments, and consumer protections as well as location. The ordinance empowered the city to take action to protect their residents, and the 35 other Texas cities have followed suit, passing similar ordinances.
City leaders have an opportunity to make an impact at the federal level by showing public support for the CFPB’s proposed regulation. This rule would require lenders, before making a loan, to make sure their consumers have the ability to repay it. The rule would also reduce the number of times a lender can attempt to withdraw funds from a customer’s account, which prevents the bank from charging additional fees.
City leaders are well-positioned to have a major impact on how predatory payday and auto title lenders can impact the financial lives of their residents. The CFPB is very interested in hearing from you, but the deadline is Oct. 7th. Click here to read the proposed rule and submit comments. Additional information about payday lending and the proposed rule can be found in this factsheet as well as on the CFPB’s blog.
About the author: Courtney Coffin is an associate for Economic Opportunity and Financial Empowerment in the NLC Institute for Youth, Education, and Families. Contact Courtney at firstname.lastname@example.org.