Louisiana consumers have cause to celebrate.
Last month, the Consumer Financial Protection Bureau (CFPB) issued a set of regulations that, when finalized, will curb the predatory lending practices that have plagued our state for years. The harm inflicted on consumers and communities by car title and payday lenders is undeniable. Twenty-four state legislatures have in recent years taken action to curb the usurious practices of lenders, including 15 states that have prohibited payday lending altogether. The Louisiana Legislature had the opportunity to do just that in 2013 with a bill that would have capped interest rates on short-terms loans at 36 percent APR (annual percentage rate). Unfortunately, intense lobbying efforts and campaign donations by the predatory lending industry led to the bill’s defeat. I anticipate similar lobbying efforts to coalesce against the proposed CFPB rules during the public comment period.
Despite what the industry may say, the proposed rules represent a long-awaited federal intervention on behalf of consumers in Louisiana and other states where state leaders have failed to take action. The rules will require that short-term lenders determine a borrower’s “ability to repay” before issuing a loan. While this may seem like common sense, payday and car title lenders currently do not check to see whether a borrower has sufficient income to pay the loan back in addition to meeting their other financial obligations. In fact, the payday lender has an incentive to lend to consumers who cannot pay back the loan on time, so they can charge additional fees and interest when the borrower has to extend or refinance the loan. In short, payday and car title lending are business models built upon the concept of trapping borrowers in a cycle of debt.
Research by the CFPB found that the average payday loan borrower takes out 10 loans per year, often “churning” one loan into another when they cannot pay off the initial loan. Some consumers eventually escape the debt trap after paying an exorbitant amount in interest and fees. Others are not so lucky. Another study found that payday loan borrowers are twice as likely to file for bankruptcy as households of similar financial status that do not use payday loans.
Car title loans also severely threaten the financial security of families. The CFPB recently reported that one in five car title loans resulted in the borrower’s car being seized, and the car seized is often the household’s only vehicle.
Consumers who use payday and car title loans are not the only ones who pay the price of usurious lending. Predatory lenders also drain money from local and state economies and negatively impact the labor market. In 2014, the Louisiana Office of Financial Institutions reported that there were 329 payday lending companies operating 965 storefronts across the state. The payday lending industry self-reported issuing over 3.1 million loans and collecting $145.7 million in fees that year. Car title lenders collect $96.8 million annually in fees from Louisiana borrowers, for a total of $241.5 million in “fee drain” in the state each year. This is money taken from local businesses that sell legitimate goods and services. An economic analysis by Howard University Center on Race and Wealth found that payday loans reduced consumer spending in Louisiana by nearly $300 million in 2013 and resulted in a net loss of 669 jobs.
Strong regulations for predatory lending are win-win for Louisiana. In the states that have eliminated payday and car title lending storefronts altogether, consumers report that the absence of storefront payday lending has a positive effect on their financial status and that they have utilized an array of safer alternatives. Credit unions, churches, and other community-based organizations are increasingly offering affordable alternatives to payday loans. I sincerely hope that the CFPB rulemaking process is not significantly impacted by the lobbying efforts of the predatory lending industry and the finalized version of the rules force those lenders to operate under the proposed common sense rules.
Jeanie Donovan is an economic policy specialist at the Jesuit Social Research Institute at Loyola University New Orleans.