By Charlene Crowell
Just in time for the holiday season, three federal regulators have taken two separate actions against payday lending. One seeks to remedy outrageous wrongdoing by refunding money to past customers. The other will protect existing or new borrowers from further financial exploitation. By actively righting wrongs and implementing common-sense reforms, these regulators offer consumers prospects for a happier holiday season.
On November 20, in its first enforcement action against a payday lender, the Consumer Financial Protection Bureau (CFPB) secured an agreement from Cash America International, Inc. to reimburse $14 million to approximately 14,000 consumers. The refunds are a result of “robo-signing” debt collection documents and also overcharging on payday loans given to members of the military or their families. Affected consumers will receive a full refund. Additionally, Cash America will also pay a $5 million fine for those violations and other misconduct.
CFPB’s regulatory action is particularly significant because Cash America is one of the largest and most influential in the industry. In fact, Dan Feehan, its CEO, said at a 2007 Jeffries Financial Services conference, “[T]he theory in the business is [that] you’ve got to get that customer in, work to turn him into a repetitive customer, long-term customer, because that’s really where the profitability is.”
November 21, the next day, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) issued supervisory guidance to rein in payday lending by banks. These two regulators will now require banks making payday loans to assess a borrower’s ability to repay the loan and establish a clear limit on repeat loans.
“Every year, abusive payday loans strip billions of dollars of wealth from African-American families and we applaud the CFPB for the enforcement action taken against Cash America,” said Hilary Shelton, who holds the dual roles of director of the NAACP Washington Bureau and its senior vice-president of policy and advocacy. “We also commend the FDIC and the OCC for their guidance on payday loans as we move one more step forward in advancing economic justice for all.”
The Center for Responsible Lending (CRL) also commented on the regulatory actions, saying: “We applaud the FDIC and OCC for recognizing the harms caused by this type of lending and sending a clear message to the banks they supervise. We urge the Federal Reserve to do the same with regard to Fifth Third Bank and Regions Bank, as both of these banks continue to push payday products. And we hope the CFPB will continue its work on payday lending by promulgating a rule that stops any payday lender from trapping borrowers in debt.”
Indeed, further regulatory action is needed. Research has long shown that many payday loan borrowers soon become mired in a turnstile of debt that worsens with every repeat loan.
Earlier this year, Rebecca Borne, CRL’s senior policy counsel, testified before the Senate Special Committee on aging, advising how more than 13 million older Americans struggling to live on $21,800 a year or less are often caught into payday lending’s debt trap. In two states – Florida and California – one in five payday borrowers is age 55 or older.
Similarly, other research has shown that more than one-quarter of bank payday borrowers are Social Security recipients and are 2.2 times as likely to have a bank payday loan as other bank customers. Further, to repay bank payday loans, an average of 33 percent of retirees’ next Social Security check is taken.
Don’t let your holiday season become a financial nightmare. Every day, but particularly at this time of year, consider these facts on payday loans:
- The typical payday borrower remains in debt for 212 days;
- The average payday borrower has nine transactions per year;
- Ninety percent of the payday lending business is generated by borrowers with five or more loans per year; and
- More than 60 percent of business is generated by borrowers with 12 or more loans per year.
This year and every year, avoid any financial product or loan that leaves borrowers with more problems than before. Whether from a storefront or from a bank, a payday loan is nothing more than a debt trap by design.
Charlene Crowell is a communications manager with the Center for Responsible Lending. She can be reached at Charlene.email@example.com.