Predatory PayDay Loans Are Hard to Stop

There are 20 million payday and car title loans made each year…….and their  “track record”  is extremely ugly.

• Instead of being quickly paid off, the vast majority of payday and title loans result in another loan. Eighty percent of payday and auto title loans will be rolled over or followed by an additional loan within just two weeks of the initial loan, as borrowers are unable to afford other essential expenses. 
• A typical borrower takes out eight loans during one year, paying an average of $520 in interest on a $375 loan.  
• Payday loan borrowers who fail to keep up with payments—i.e., roughly 1 in 4 loan customers—may see their bank accounts closed due to insufficient funds, making it more difficult and expensive for them to manage money in the future. 
• About 1 in 5 title loan borrowers have their vehicles seized or repossessed by the lender when they cannot keep up with payments—and they may still owe debt in addition to repossession fees.
• Residents of rural areas and low-wage workers with ever-changing work schedules are particularly vulnerable due to major gaps in public transportation.
• Ultimately, this may lead to eviction or foreclosure, with devastating consequences not only for affected families.  foreclosure and eviction are of course a primary cause of homelessness 
• It also leads families into substandard housing arrangements such as unsafe neighborhoods or units with physical and safety hazards. 
• The privileged position of payday and title lenders also means that child support payments take a back seat to recurring financial obligations.
• Noncustodial parents run the risk of garnished wages, liens against assets, suspended licenses, and even incarceration. 
• Married couples may be strained by these debts as well. The economic instability associated with debt may undermine some of the basic expectations that couples have before they enter into a marriage, which can cause partners to exit the arrangement.
•   The deeper the debt trap in which a household is caught, the more likely it is to face varying degrees of marital strife.
•   Also, poor credit can make it difficult for survivors to find or keep a job.   

Given this hideous record of undesired, undeniable consequences, numerous cities and states have tried to regulate the interest rates on these loans.

•  Over 20 states and the District of Columbia have laws setting a 36%APR  cap for payday loans, including fees. 

• The Military Lending Act (MLA) sets a 36% APR cap for loans to service members and their families. 

In the face of such regulation, what did the payday loan industry do?  

In some cases,  they secretly installed their loan business on Indian reservations, and went on doing business as usual under the name of the tribe.

If anyone complained, the  crafty lenders said that their  practices were covered by tribal law.                    

 Each loan agreement explicitly stated (falsely) that it was made and accepted on the reservation.

 The payday lenders used a Native American tribe’s sovereign immunity….. thereby precluding the enforcement of applicable usury laws that cap interest rates.

The courts are catching up to this scam. A three-judge panel  ruled that a Midwestern lender owes a class of Virginia borrowers nearly $44 million in damages for engaging in racketeering.  They had no legitimate  claim to tribal affiliation, but made loans online to Virginia borrowers with annual percentage rates above 700% — nearly 60 times Virginia’s legal limit of 12%.

Courts are applying the “true lender doctrine” — a legal principle that  determines the lender on a loan by assessing which actor draws the most economic reward from the transaction. 

 The Trump administration appears to undo this protection  — by telling courts that the true lender is simply the one listed on the loan agreement. In practice, this means that as long as a tribe is named on the paperwork as the originator of the loan, nothing else matters—even if a payday lender is actually administering the loan and reaping most of its profit.  

The  legal opposition to rent-a-tribe programs was centered in the Consumer Financial Protection Bureau – which the Trump team attacked and de-funded immediately after taking office. 

It cuts funding in half for the Consumer Financial Protection Bureau — the agency responsible for policing financial frauds and scams committed by businesses that prey on the vulnerable, such as payday lenders.

The dismantling of the CFPB, which the Trump administration has already begun, will ultimately hurt the very working people who Republicans claim to represent the most. Conservatives who preach the virtues of hard work readily condemn the poor for their alleged moral failings yet show little concern about the predatory lenders or crypto scammers who profit off of their desperation.

There is one ray of light in Minnesota regarding this ugly business. 

When a payday store opened nearby a church in South Minneapolis in 2011, the congregation took notice. They decided to take a stand with their fellow community members facing economic crisis. Exodus Financial Services, known as Exodus Lending, was founded as a first-of-its-kind nonprofit to solve the payday loan problem.

Exodus helps borrowers get back on track financially — by enrolling and supporting them in a 0% interest refinance program, lending up to $2,500 to qualified participants. You pay off your loans without interest, and then you are done.

The funds required to cover any shortfalls come from local churches. This is appropriate, because I suspect that the problem ultimately relies on charity and religion for a solution.