Preserving payday loan debt traps

One of the Obama administration’s signature consumer-protection actions was to write a longawaited, badly needed set of rules for payday loans that the Consumer Financial Protection Bureau issued in November 2017. So it was hardly surprising Wednesday when the Trump administration, which has devoted so much effort to erasing its predecessor’s accomplishments, came to the rescue of the payday lenders that monetize the desperation of financially strapped Americans.

It’s a reprehensible move. And in laying out its reasons for easing up on payday lenders, the administration signaled its unwillingness to regulate predatory lending.

Payday lenders offer relatively small shortterm loans to anyone with a paycheck and a bank account, regardless of his or her financial health. It’s precious close to no-questions-asked lending. The catch is the loans have to be repaid in full within two to four weeks, and the fees charged — most commonly $15 per $100 borrowed — are the financial equivalent of a triple-digit annual interest rate. About 15 states block payday lending; the rest cap such loans at $300 to $1,000.

These loans are so costly for consumers, no one with access to a Visa card or a home equity line of credit would ever dream of taking one out. That’s why the loans are considered a lastresort form of borrowing for people with few assets or bad credit — for the financially desperate.

Yet borrowers who live paycheck to paycheck often have no ability to repay a payday loan on time, so they end up digging themselves into deeper holes. In developing its 2017 rules, the Consumer Financial Protection Bureau found that the payday loan industry made most of its profits off of debttrapped borrowers who, after taking out one loan, took out half a dozen or more in quick succession just to get back above water. Consumers who borrowed seven or more times in a year accounted for 90 percent of the fees the industry collected, the bureau reported in 2017, and those who borrowed 10 or more times accounted for 75 percent of the fees.

That’s why the bureau’s 2017 rules barred payday lenders from making a loan unless they determined the borrower could repay it, just as banks and mortgage lenders must do with their larger loans. The rules carved out an exception for loans of less than $500, but only if borrowers were allowed to repay the amount in stages over about three months. Finally, they limited the number of payday loans that a person could take out in quick succession, while cracking down on lenders’ efforts to collect payments from borrowers’ depleted bank accounts.

Not long after President Donald Trump named a new leader at the bureau, it started attacking the 2017 rules. That process culminated Wednesday in a proposal to lift the requirement that payday lenders check a borrower’s ability to repay and allow them to make as many loans to individual borrowers as state law permits.

This is the Nanny State in reverse, where government seems more concerned about business’ ability to offer a product than people who use it.

The Trump administration contends that it’s trying to preserve a valuable form of credit. It is not. Rather than trying to extend reasonable forms of credit to those who need it, the administration is going to bat for a business model that takes unfair and abusive advantage of people with too few good options.

Los Angeles Times