April 9, 2014
For millions of Americans, the financial crisis that robbed them of their homes, retirement savings and jobs is still in full swing. The urgent need to build and rebuild lost wealth is daunting, especially because predatory payday lenders have made it their mission to supercharge debt for the already downtrodden.
They do this by trapping borrowers in loans with annual interest rates of 300 percent or higher (pdf). The entire payday lenders' business model is built around this entrapment. The very structure of these loans, the way they are marketed and the strategic location of the stores are all designed to entice borrowers into a vicious circle of repeat lending.
A typical payday loan must be repaid in full within two weeks. Because many payday companies lend without seeing whether a borrower can repay, the borrrower often needs to take out another loan right away to repay the first one. According to the Consumer Financial Protection Bureau, only 15 percent of payday borrowers have the means to repay the loan within two weeks.
The working poor who walk into payday stores may intend to visit once, but many fall into the trap that has been set for them and struggle with the outrageous interest and fees. In just a short time, the cost of a $500 loan can balloon to more than $1,000.
Payday lenders are notorious for targeting older Americans, men and women in military service, and communities of color. Studies show that payday lenders choose to concentrate their businesses in the same African-American and Latino communities that have long been targeted by unscrupulous lenders and harmed disproportionately by the financial crisis. At a time when wealth building has never been more urgent--particularly in these communities--payday lenders are busy draining it away.
But it's not just communities of color being harmed by payday lending; it's a problem for all of us. Every dollar someone spends paying back payday-loan interest and fees is a dollar not spent in local communities--at local businesses--leading to job losses, not gains, and even pushing families into bankruptcy. A study (pdf) issued last year showed that the diversion of funds away from the local economy and bankruptcy caused by payday loans cost our economy nearly $1 billion in 2011.
The payday industry works hard to make sure state and federal legislators ignore these realities. Between 1998 and 2011, payday lobbying expenditures increased from $230,000 to $4.5 million. But some states have stood up against this lobbying behemoth; New York is a shining example.
New York has a long history of keeping predatory lenders outside its borders by limiting interest rates to a maximum of 25 percent. Recently, under the leadership of Gov. Andrew Cuomo and New York's top financial regulator, Benjamin Lawsky, the state has reined in payday lenders who operate illegally online, as well as the banks that help them circumvent regulation.
Last year my organization, the Leadership Conference on Civil and Human Rights, unanimously passed a resolution calling for an end to payday lending. More than 200 national groups, including the NAACP, the National Council of La Raza and the National Congress of American Indians, came to a clear and resounding consensus that loans with triple-digit interest rates are antithetical to that goal.
Many states have already rejected payday lending or enacted protections to reduce the harm, but additional states and the federal government need to catch up. The financial crisis may be over for the wealthy, but it's alive and well for the millions of Americans who believe their only chance for a bailout is actually a predatory payday loan.