Payday loans are big business in Iowa with 613,461 transactions totaling $220 million in 2015, an Iowa Division of Banking survey shows. What the statistics don’t show are Iowans struggling from paycheck to paycheck who turn to these short-term payday loans for basic needs such as repairs, rent or medical bills. They’re reluctant to come forward, however, suffering in silence.
It is an injustice to allow payday lenders to charge 300 percent annual interest rates on short-term loans to people who can’t possibly catch up with payments. The Pentagon, responding to the negative impact payday loans had on its military families, capped loan rates at 36 percent annually. Shouldn’t we do the same in Iowa and, better yet, nationwide?
In June, the federal Consumer Financial Protection Bureau (CFPB) proposed new rules regulating lenders in the payday loan industry. The U.S. Conference of Catholic Bishops (USCCB) and the Iowa Catholic Conference (ICC) also support the rules. These rules would make sure borrowers can afford to pay off their loans, end the debt-trap cycle by making it more difficult for lenders to re-issue or refinance a borrower’s loans, and regulate the penalty fees. (money.cnn.com/2016/06/02)
The ICC has been working for years to reform payday lending in Iowa and help people avoid a “debt cycle” which is very difficult to escape. While the proposed federal rules may help the situation by requiring borrowers to prove their ability to repay the loan, six payday loans could be made before the requirement kicks in. The requirement should kick in from the start.
A letter from a faith coalition (which includes the USCCB), called for an end to predatory payday lending and identified points of concern the CFPB should address. The first point: some states already have strong usury laws with limits on interest and fees that protect financially vulnerable borrowers. The faith leaders requested assurances that the proposed federal rules will not undermine state law.
They also asked the CFPB to prohibit the use of past payday loan repayment as evidence of a borrower’s ability to pay, and to set limits on the number of loans per borrower and a time limit for indebtedness. In Iowa, the average number of loans per customer was 12 in 2015! Unable to pay off the first loan in a short amount of time, the borrower must extend the loan and watch the fees escalate. The rest of us would never accept such outrageous interest rates.
“…payday loans are made in a way that make it almost impossible for borrowers to repay in the required timeframe, requiring them to take on more debt,” the USCCB observes in an article on Predatory Banking & Payday Lending (www.usccb.org). “Most borrowers take out payday loans to pay for basic needs, not for unexpected emergencies or to splurge.… The vast majority of payday loans are taken out by people in or near poverty. The typical borrower makes $22,000 (annually)….”
As the faith leaders recommend, the CFPB must ensure that lenders do not keep borrowers in short-term loans for extended periods of time. Rules also need to be crafted to prevent lenders from seeking to issue high-cost, longer-term installment loans that attempt to circumvent the proposed regulations on short-term loans. The comment period on the proposed rulemaking is over, but there’s still time to contact your newly elected members of Congress about this important issue.
At the state level, the ICC will keep an eye on legislation regarding predatory payday lending in general and longer-term installment loans specifically. Stay aware of what’s happening by signing up for ICC action alerts (www.iowacatholicconference.org). Our state legislators need to hear from us that predatory payday lending is a violation of the common good.
Keep in mind that legislators are concerned about taking away an option for people with low incomes, even if the option is a bad one. Their reasoning requires another editorial about barriers that prevent people from flourishing. That should not keep legislators from doing the right thing: cap interest rates at 36 percent or less on payday loans, just as the Pentagon has done for military families.
Barb Arland-Fye, Editor