End Payday Loan Debt Trap
Every seven years, the Bible declares a year of financial forgiveness, of starting over. As we near the close of this such shmita year, we have seen some progress nationwide toward this commandment in Deuteronomy to release our brothers and sisters from the shackles of debt. For this year has seen a long-awaited proposal from the Consumer Financial Protection Agency (CFPB) that has the potential to rein in the worst abuses of payday lending nationwide.
But there is still a great deal more work to be done. For the rule as it was originally proposed does not achieve the goal of protecting our neighbors, seeing them free from oppressive debt. Indeed, it may actually makes matters worse in states like ours which have put strong laws in place already.
In 2010, Montanans overwhelming voted to cap rates on payday, car title and long-term payday loans, effectively shutting the predators out of our state. The result is that our citizens save over $35 million annually that would otherwise be spent on fees to float unaffordable payday and car title loan debt. The savings from our rate cap benefit not only individual people and communities, but the state economy as a whole.
In fact, nearly a third of Americans today live in the 14 states and the District of Columbia that effectively ban payday lending. And no one misses it. Studies show that people are better off without it – and that it has no effect on access to credit.
The CFPB cannot, by law, create a nationwide rate cap. Instead, it has put forth a rule that would require payday lenders simply to make loans that are affordable. An affordable loan is one the borrower can reasonably be expected to repay without taking out additional loans and without defaulting on other basic living necessities.
This is a smart, fair, flexible standard and it would not get in the way of Montana’s rate gap.
The rule does not preempt state law. Unfortunately, the proposal contains tremendous loopholes that will both weaken its effectiveness overall and put rate caps at risk.
Most damaging to Montana is that the proposed rule, as currently written, exempts the first six loans from any underwriting standards. This in essence puts a government seal of approval on loans with interest rates nearing 400 percent.
That’s strong ammunition for industry lobbyists trying to overturn rate caps.