Get tougher in reforming the disgraceful payday loan industry
Despite a long-awaited new federal rule, the payday loan industry in the Kansas City area and elsewhere will continue to reprehensibly trap low-income Americans under mountains of debt.
A hearing held Thursday at the Music Hall in downtown revealed grim personal stories of those who have been forced to repay many times the amount they borrowed in payday loans.
The lenders and supporters got their own chances to claim that some changes proposed by the Consumer Financial Protection Bureau would stifle their ability to provide cash to people who desperately need it.
That’s outrageously misleading, which is par for the course.
Especially in Kansas City — where some of the top promoters of the payday loan industry have thrived — we’ve seen the damage done to individuals and families who have become trapped into nearly endless borrowing/repaying cycles.
Even the term “payday loan” is often a misnomer. It implies that the customers will be given only enough money that they can quickly repay, with minimum interest, when their next payday arrives.
But real-life expenses often interfere with these plans, especially for people who already are underpaid or underemployed. When they can’t make good on the initial loan, the industry is only too happy to extend more credit and more time to repay it.
As the Consumer Financial Protection Bureau aptly put it, “Faced with unaffordable payments, consumers must choose between defaulting, reborrowing, or skipping other financial obligations like rent or basic living expenses like food and medical care.”
All of this too often leads to far higher costs than first thought for consumers, with effective annual interest rates that climb past 300 and even 400 percent.
Politicians in Missouri have been notoriously absent from any productive discussions on how to protect consumers. Instead, fueled by contributions from the payday loan industry, General Assembly members have allowed it to flourish, even after seeing some of the despicable actions engaged in by Kansas City-area payday loan officials.
At Thursday’s forum, part of the discussion focused on a positive-sounding federal rule that supposedly will require lenders to ensure that their customers can repay their loans and “still meet basic living expenses and major financial obligations.”
Other parts of the rule attempt to limit how many loans a customer can take out.
These are common-sense ideas, but they don’t go far enough in limiting the damage this industry can cause as it preys on people’s desire to make ends meet.
Indeed, the nonprofit Pew Charitable Trusts said this week that the new Consumer Financial Protection Bureau rule is “heading in the wrong direction.”
Specifically, Pew officials said, it would “allow unaffordable payday loans with 400 percent” interest rates to continue, while largely preventing banks from offering lower-cost alternatives.
On other fronts, it is positive to see that the giant search engine Google will ban payday loan ads.
However, consumer protection remains spotty across America because government agencies and elected officials won’t go far enough in cracking down on the industry. Even a simple cap on total interest paid for a loan — or limiting the fees that payday lenders can charge — remain elusive in too many states, including Missouri.
The experts at Pew Charitable Trusts think that the new federal rule should limit a customer’s monthly payment to 5 percent of monthly income. That would allow regulated banks to be more competitive in lending to Americans, at a lower price to them.
The Consumer Financial Protection Bureau should err on the side of putting in place the strongest possible ways to kill the bad actors in the payday loan industry. There are too many of them, and they are earning outrageous profits on the backs of far too many people.
This story was originally published June 3, 2016 at 3:19 PM.