It’s the first week of February and Anthony Goytia has already spent his tax refund. It all went towards one thing: paying off his payday loans.
“It wasn’t as big as we usually get, so we weren’t able to pay everything we wanted to. I still have two outstanding payday loans and my wife also has two. And then, together we have one installment loan,” said Goytia, who paid down about $3,000 worth of loans with his tax return. One in six payday loan borrowers used a tax refund to pay off their payday loans, according to a 2013 Pew Charitable Trust report.
For millions of Americans, payday – including the day they get their tax refund – is not a day they look forward to. Instead of collecting their hard earned cash, they watch as it changes hands from their employer to a debt collector.
Since it was founded three years ago, the Consumer Protection Finance Bureau has been fielding complaints from hundreds of consumers who have fallen victim to payday loans. The Dodd-Frank Act, the same 2010 law that led to the creation of the agency, gives it the authority to regulate the payday industry. The bureau is expected to use that authority to propose new rules to regulate the industry. As part of that process, the bureau’s director, Richard Cordray, will appear in Richmond, Virginia, at a payday lending field hearing on Thursday.
The bureau is currently drafting new rules that are meant to help protect consumers. On one side, there are lawmakers and consumer advocates who want to see the end of the predatory payday loans that trap borrowers in a never-ending cycle of debt. On the other, there are those who worry about what will happen when such lines of credit are cut off for good and the US’s poorest people have no access to cash when they 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 information for their bank account. Then in two weeks – typically by the consumer’s next payday, hence the name of the loans – they either pay the loan in full or pay just the interest and roll over the loan for another two weeks. Consumers who roll over the loan time after time can end up paying as much as 300% in interest and fees over the span of a year.
After one of his other creditors accidentally withdrew four time 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 about the interest rates, because we never had to take out a payday loan and as time went on, my wife said to me: ‘When are we going to be done paying these people?’” said Mosley. Even after attempting to pay down the loan for nine months, “the balance never seems to go down.”
In Texas, where Mosley has lived most of his life, poor Americans struggle with paying down their debt. Threatening borrowers with arrests if they don’t pay their debt had been illegal in Texas for years, but some payday lenders continue to file criminal complaints against their delinquent borrowers. A fraction of their complaints have resulted in arrest warrants and at least six borrowers have served time in jail, according to analysis by Texas Appleseed.
The typical payday loan borrower spent at least five months a year in debt. Photograph: Paul Sableman/ flickr
In 2010, about 12 million Americans used payday loans, according to the Pew Charitable Trust. Majority of them, at 69%, took out the loans to cover recurring expenses like utilities, rent, credit card bills or food. On average, these borrowers took out eight loans, rolling each over within 18 days. While the loans averaged about $375, the interest came out to as much as $520. The typical borrower spent at least five months a year in debt.
Until now, the agency’s action on payday loans has been pretty toothless. Out of the almost 1,500 complaints about payday loans abuse that the agency received last year, just 5% resulted in financial compensation. Another 6%, while not resulting in any monetary relief, were resolved with actions such as repairs to victim’s credit report, according to Al Jazeera America .
Some states, including Ohio and South Dakota, have attempted to curtail predatory payday loans on their own, only to have the lenders adjust just parts of their products to fit the new regulations. In some cases, those desperate enough to obtain a payday loan have done so by crossing the border or finding one online. As a result, the CFPB is taking time to ensure that its attempt to regulate payday loans nationwide won’t be as easily thwarted.
“It’s well worth the additional time in order to make sure that what we do won’t made a mockery of by the people circumventing [the rules] just by transforming
their product slightly,” Cordray, the bureau’s director, told the Senate banking committee in June .
While lawmakers don’t dispute 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 cannot access it through the US banking system.
In 2013, about 9.6m US households were unbanked, according to the Federal Deposit Insurance Corporation. A third of households without bank accounts said that loss of a job and income were the reasons they closed down their accounts. Another 24.8m 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 tell [my constituents] if they came to me and said they had an emergency and they needed to get $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 asked Cordray when he presented the bureau’s semi-annual report to Congress at the beginning of March. The congressman pointed out that besides payday lenders or pawnshops there are few to none options for people to obtain small loans quickly.
One solution to this problem has been proposed by Senator Elizabeth Warren, who suggested that the United States Postal Service begin offering basic banking services such as bill paying, checks cashing and small loans.
“We believe people need access to credit for those purposes, exactly the kind of things you are talking about, emergency needs, but we should not easily tolerate that people end up rolling loans over and over and they end up paying far more in the first place and they’re in a debt trap,” Cordray told Westmoreland.
As for what the CFPB proposed rules will be: “That will unfold and there will be a lot of public input into it,” said Cordray during the hearing.
One thing is clear: CFPB cannot cap interest rates and fees. What it can do is control who is given a loan.
“These people, they seem nice. They seem willing, but behind it all they knew better than to give us loans,” said Mosley of the payday lenders. “They didn’t care. They just gave us a loan.”
Under the proposed rules, the bureau could require payday lenders to run credit checks on borrowers. That way they can ensure whether or not the borrowers will be able to repay the loans they take out. Other measures could include placing caps on number of times a borrower can rollover a payday loan or adjusting the length of these short-term loans. The bureau has found that more than 80% of payday loans are rolled over within two weeks. About half of them are rolled over at least 10 times.
Mosley, who works as a loss prevention specialist at a discount store, said he doubts he could have passed a credit check.
“I would tell anyone at this point: don’t do it. Do not do it. If I had known what I know now about payday loans, I never would have looked their way,” he said. Yet had he not taken out that loan, he probably “would have gotten evicted and our car would have gotten picked up”.
When Guardian spoke to Mosley, he was working on securing a low-interest loan to pay off his payday loans.
‘Right now, right now, it’s just about surviving,’ said Anthony Goytia about his financial situation. Photograph: Courtesy of Anthony Goytia
Anthony Goytia, who left his job at Walmart last fall and currently works for UPS, said that requiring payday loan borrowers to pass a credit check “defeats the purpose”.
“The purpose of people getting a payday loan is because they are desperate for cash and they need to pay some type of a bill and they don’t have the credit to do so,” he explained. “Usually, the type of people who are getting payday loans are people like me, who are broke the entire time. We don’t have any credit, never bought a brand-new car in my life. I have a used car. It doesn’t make any sense.”
Earlier that day, his car had broken down on the side of the road.
He doesn’t regret taking out the payday loans. “You gotta do what you gotta do,” he said.
Will he ever pay them down? “If I win the lottery,” he said, chuckling to himself. Right now, he is working on paying off an installment loan he took out with his wife so that their wages are not garnished. As for the payday loans, he thinks they might already be in collection. The resulting bad credit means nothing to him.
“I can’t buy a new car anytime soon. I am not buying a house anytime soon,” he laughed. “I don’t need to have an iPhone or a tablet or something I need credit for. I am surviving just the way I am. I am surviving without credit.”
Category: Payday loans