By Brando Sencion
The Consumer Financial Protection Bureau (CFPB) recently decided to remove rules that protected vulnerable borrows from accruing ballooning debt that can be created by payday loans. The last set rules released in 2017 aimed to protect consumers from unfair lending practices of the payday lending industry. The original rule required that lenders determine whether a borrower could actually afford to pay back a loan before offering them one. The news rules aim to remove these protections and allow payday lenders to operate freely.
Payday lenders typically offer small loans to borrowers who promise to pay the loan back by their next paycheck. However, interest on one of these loans can have an annual percentage rate of up to 390 percent or more. In California, the maximum fee a payday lender can charge is 15 percent of the face amount of the check. But that 15 percent fee is equivalent to an annual percentage rate of 460 percent!
The other issue with payday loans is that they are structured to force people to take out additional loans when they cannot pay their previous loan. Research by CFPB estimates that 80 percent of loans are rolled over, and half of borrowers end up taking out ten or more loans in a year. Consumers fall into a cycle of debt that is difficult to escape because of the payday lending structure.
However, some states are fighting back payday loan businesses and protecting their consumers. Voters in Colorado last November approved Proposition 111, Limits on Payday Loan Charges Initiative. The proposition reduces the annual interest rate on a payday loan to yearly rate of 36 percent and eliminates all other finance charges and fees associated with payday lending. 77 percent of voters supported the initiative, to end an average APR of 129 percent on payday loans in Colorado.
As rules and policies for the payday lending industry change, it is important to educate ourselves as consumers. But as community leaders it is important to inform our communities of these changes to prevent families from falling into a cycle of debt. Mamás con Más a project with the UC Santa Cruz Blum Center and SCCV examined mothers’ experiences with financial providers, and mapped the location of alternative and traditional financial services, showing the disproportionate concentration of alternative financial services such as payday loans, check cashing, money transfer services and more, in Watsonville, CA compared to Santa Cruz, CA.
Building from Mamás con Más, the project recommended to limit alternative lenders such as payday loans in Watsonville and Santa Cruz County, due to high interest rates and fees, which push families deeper into debt. And develop policies that ban or restrict the number of alternative financial services and limit the allowable interest charged. Restricting the number of predatory lending businesses in the City of Watsonville would benefit the community. And not allowing new payday lending businesses to open until a current business closes would be beneficial.