Now, nearly two years after his nomination as Director of the Consumer Financial Protection Bureau, Richard Cordray has been confirmed finally and can now step up his game even more on policing the financial services industry.
In addition to holding banks and financial firms accountable, he has the opportunity to take more aggressive steps to curb the abusive practices of payday lenders, who offer high-interest, short-term credit that engulf many consumers in a vicious cycle of debt and leave already-struggling consumers worse off.
Under the best of circumstances, payday loans are supposed to be a quick fix to an unexpected financial predicament. They help bridge the brief gap between paychecks and are easily accessible, especially for consumers who may not qualify for other forms of credit. Problems arise, however, when the rubber hits the pavement and the loans need to be repaid. The rapid repayment requirement often leads to consumers taking out fresh loans and racking up more fees, which leaves little room for getting out from under the debt.
To make matters worse, the fees and interest rates associated with the loans are crippling. Borrowers typically face interest rates as high as 400 percent. And 90 percent of payday lending revenue comes from just the fees charged to repeat customers. In a new study recently released by the Consumer Financial Protection Bureau, it was determined that the average payday loan recipient is indebted a staggering 196 days of the year.
Other studies have shown that more than 75 percent of all loans are not taken to deal with an emergency need but are instead the result of covering borrowers from one loan to the next. A borrower's ability to repay the loan is never taken into account. So, what began as a short-term solution quickly turns into a chronic cash flow shortage.
The net result is that consumers are left even more vulnerable. The terms of these loans give lenders direct access to the borrower's bank accounts, forcing full repayment on the day a paycheck is received. This means that the loans get top priority and are the first to be paid off before food, rent and other essentials. Consequently, borrowers are left struggling to pay off other bills and often face losing basic banking privileges and even bankruptcy. Frankly, these lenders are nothing more than a modern-day loan shark who has the ability to knock you off at the kneecap by beating up your bank account and draining all the money out of it.
Needless to say, the response of federal regulators to step up the pressure on payday lenders, particularly the big banks, is moving the industry in the right direction. Proposed accountability requirements include a mandatory "cooling off" period between loans so that borrowers cannot take out more than one loan per pay cycle. Additionally, banks would have to implement standard underwriting practices to ensure that a borrower could indeed repay the loan and lenders would be prohibited from granting a new loan until the former one was repaid.
While payday loans were never designed to solve long-term financial needs, the structure of the system has turned them into a long-term nightmare for many consumers. The reckless lending that has flooded too many of our low- and moderate-income communities in recent years is cause for growing concern. We should applaud the new resolve of the CFPB, other federal agencies and state legislatures to thwart these abusive practices. But we cannot become complacent. We must keep our foot on the gas pedal, as there is much more work to be done to ensure safe and sound lending for America's working families.
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