It is the first week of February and Anthony Goytia has already spent his tax refund. Everything has served one purpose: to pay off his payday loans.
“It wasn’t as big as it used to be, so we couldn’t pay for everything we wanted. I still have two payday loans outstanding and my wife also has two. And then together we have an installment loan, ”said Goytia, who paid off about $ 3,000 in loans with her tax return. One in six payday loan borrowers used a tax refund to pay off their payday loans, 2013 study finds Pew Charitable Trust report.
For millions of Americans, payday – including the day they get their tax refund – isn’t a day they look forward to. Instead of collecting their hard-earned money, they watch their employer’s move to a debt collector.
Since its inception three years ago, the Consumer Protection Finance Bureau has received complaints from hundreds of consumer victims of payday loans. The Dodd-Frank Act, the same 2010 law that led to the agency’s creation, gives it the power to regulate the breakdown industry. The bureau should use this authority to come up with new rules to regulate the industry. As part of this process, office manager Richard Cordray will appear in Richmond, Va., At a payday loan court hearing Thursday.
The office is currently drafting new rules to help protect consumers. On the one hand, there are lawmakers and consumer advocates who want to see an end to predatory payday loans that trap borrowers in a never-ending cycle of debt. On the other hand, there are those who worry about what will happen when those lines of credit are cut for good and the poorest people in the United States will not have access to cash when they do. they will need it to pay for things like emergency repairs, rent or food.
Payday loans work like a cash advance. To vouch for the loan, consumers provide lenders with a dated check or bank account information. Then in two weeks – usually before the consumer’s next payday, hence the name of the loans – they either pay off the loan in full or pay only interest and renew the loan for another two weeks. Consumers who renew the loan repeatedly may end up paying up to 300% interest and charges over a period of one year.
After one of his other creditors accidentally took out four times more than he was supposed to, Jerry Mosley said he and his wife had no choice but to take out a payday loan.
“We didn’t really understand interest rates because we never had to take out a payday loan and over time my wife said to me, ‘When are we going to finish paying these people? Mosley said. Even after trying to pay off the loan for nine months, “the balance never seems to go down.”
In Texas, where Mosley has lived most of his life, poor Americans are struggling to pay off their debt. Threatening borrowers with arrests if they don’t pay their debt has been illegal in Texas for years, but some payday lenders continue to file criminal complaints against their delinquent borrowers. A fraction of their complaints resulted in arrest warrants and at least six borrowers served jail time, according to Texas Appleseed’s analysis.
In 2010, about 12 million Americans used payday loans, according to the Pew Charitable Trust. The majority of them, at 69%, took out loans to cover recurring expenses like utilities, rent, credit card bills or food. On average, these borrowers took out eight loans, each renewed within 18 days. While the loans averaged around $ 375, the interest was $ 520. The typical borrower takes on debt at least five months a year.
So far, the agency’s action on payday loans has been quite toothless. Of the nearly 1,500 payday loan abuse complaints the agency received last year, only 5% resulted in financial compensation. Another 6%, although there was no monetary relief, were resolved through actions such as repairing the victim’s credit report, according to Al Jazeera America.
Some states, including Ohio and South Dakota, have attempted to reduce predatory payday loans on their own, so that lenders only adjust parts of their products to accommodate new regulations. In some cases, those who are desperate enough to get a payday loan have done so by crossing the border or finding one online. As a result, the CFPB is taking the time to ensure that its attempt to regulate payday lending nationwide is not so easily thwarted.
“It is well worth the extra time to make sure that what we are doing is not ridiculed by the people bypassing [the rules] just by slightly transforming their product ”, Cordray, office manager, tformer Senate Banking Committee in June.
While lawmakers aren’t disputing that payday loans need to be regulated, many are particularly concerned about how the new rules might affect those who find themselves strapped for cash and can’t access it through the U.S. banking system.
In 2013, around 9.6 million American households were unbanked, according to the Federal Deposit Insurance Corporation. One-third of households without a bank account said the loss of a job and income were the reasons they closed their accounts. Another 24.8 million were “underbanked,” having a bank account but also using alternative financial services such as payday loans and check cashing.
“If you were me, what would you say [my constituents] if they came to me and told me they had an emergency and needed $ 50 or $ 100 for a week or three or four days? Where would you advise me to tell them to go to get that kind of credit? Georgia Congressman Lynn Westmoreland Cordray asked when he presented the office’s mid-year report at the Congress in early March. The congressman pointed out that in addition to payday lenders or pawn shops, there are few or no options for people to get small loans quickly.
A solution to this problem was proposed by Senator Elizabeth Warren, who suggested that the United States Postal Service begins offering basic banking services such as paying bills, cashing checks and small loans.
“We think people need to access credit for these purposes, exactly the kind of things you’re talking about, emergency needs, but we shouldn’t easily tolerate people ending up renewing their loans over and over again. and that they end up paying a lot more at first. up and they’re in a debt trap, ”Cordray told Westmoreland.
As to what the rules proposed by the CFPB will be: “It will play out and the public will participate a lot in it,” Cordray said at the hearing.
One thing is clear: the CFPB cannot cap interest rates and fees. What it can do is control who gets a loan.
“These people, they look nice. They seem willing, but behind it all they knew better than to give us loans, ”Mosley said of payday lenders. “They didn’t care. They just gave us a loan.
Under the proposed rules, the bureau could require payday lenders to perform credit checks on borrowers. This way, they can make sure that the borrowers will or will not be able to repay the loans they take out. Other measures could include capping the number of times a borrower can roll over a payday loan or adjusting the length of these short-term loans. The bureau found that over 80% of payday loans are renewed within two weeks. About half of them are knocked down at least 10 times.
Mosley, who works as a loss prevention specialist at a discount store, said he doubted he was able to pass a credit check.
“I would say to anyone at this point: don’t do it. Do not do that. If I had known what I know now about payday loans, I would never have looked in their direction, ”he said. However, if he had not taken out this loan, he “would probably have been kicked out and our car would have been recovered”.
When Guardian spoke to Mosley, he was working on getting a low interest loan to pay off his payday loans.
Anthony Goytia, who quit his job at Walmart last fall and currently works for UPS, said requiring payday loan borrowers to pass a credit check “defeats the purpose.” .
“The point of people who get a payday loan is because they are in desperate need of money and they have to pay a bill and they don’t have the credit to do it,” he said. Explain. “Usually the type of people who get payday loans are people like me who are broke all the time. We have no credit, I have never bought a new car in my life. I have a used car. It does not mean anything.
Earlier today, his car had broken down on the side of the road.
He does not regret having taken out the payday loans. “You have to do what you have to do,” he said.
Will he ever pay them back? “If I win the lottery,” he laughs to himself. At the moment, he is working on the repayment of an installment loan that he took out with his wife so that their wages are not garnished. As for payday loans, he thinks they may already be in collection. The resulting bad credit means nothing to him.
“I can’t buy a new car any time soon. I won’t be buying a house anytime soon, ”he laughed. “I don’t need to have an iPhone or a tablet or anything that I need credit for. I survive as I am. I survive without credit.