Editorial: Regulating Payday Loans
These lenders profit off customers who cannot fulfill their obligation and are forced to refinance at a higher price.
Existen muchas empresas que extienden préstamos con el aval de un cheque o promesa de pago de un empleador. Crédito: Ciro César / La Opinión
Payday loans, far from helping out consumers without access to bank services, are a financial trap, with interests as high as 600% that lead to bankruptcy. The industry, which is subjected to deficient state regulation, needs federal oversight and enforcement of consumer protection rules.
This is what the Obama administration has set out to do. The Consumer Financial Protection Bureau (CFPB) – created to look after consumers after the mortgage debacle caused by real estate loans lent to people who could not pay them back, – is considering establishing rules to regulate the $47-billion industry.
Payday loans lend money with extremely high interest rates, generating a spiral of debt through loans that are taken out to pay for previous loans, making consumers pay much more than they originally borrowed. These lenders profit off customers who cannot fulfill their obligation and are forced to refinance at a higher price. One of the changes would be precisely to demand lenders take specific measures to make sure that the customer will be able to repay.
Small lenders have a niche in the finance industry, and they serve low-income people or customers who have no credit history. The Great Recession played an important role: Since then, most people who borrow money use it to pay routine bills and, secondarily, for emergencies. This evidences the vulnerable situation where customers – mostly women and minorities – find themselves from the get-go.
It is estimated that 43% of Latinos do not have access to financial services, which forces them to turn to these lenders who offer high interest rates and leonine conditions. This is due in part to the fact that the community still lacks knowledge about the financial system and how to navigate it.
The proposals are aimed at guaranteeing that loans can be repaid; there is nothing strange about that goal. However, Republicans in Congress do not want to allow any regulations, and seek to freeze the CFPB by overwhelmingly favoring the industry at the expense of the consumer. The strategy of strangling the customer financially is immoral, and does not benefit the economy in any way except by making profiteers richer.
