Stephen Reeves, CBF’s associate coordinator for advocacy and partnerships, represented the Fellowship recently at a hearing on predatory lending hosted by the Consumer Financial Protection Bureau. Read our coverage of this event here.
Below you will find the remarks that Reeves gave to the bureau at that field hearing in Nashville on March 25:
First, I want to say thank you for the opportunity to be here and to provide some perspective from my corner of the faith community. Thank you Director Cordray and staff for the very deliberate, research-based approach to this issue. As we have seen across the country this industry is quite creative and sensitive to regulation. It is important that any new rules are done right and I know you are headed in that direction. The data released today, as well as the report last year seem to confirm in the big picture what many of us have seen at the local level.
In many ways churches and other faith communities are on the front lines of family financial stability.
One of the first stories I heard from a pastor when I began working on this issue in Texas nearly five years ago, was about a young family in his church. When they came to him for a second time for financial assistance, the pastor and deacons decided to look into their situation wondering why they continued to need help. What they found was a hole in the family’s budget created by a payday loan. The father had taken out a $700 loan and $200 was being withdrawn from his checking account every two weeks. This had gone on for four and a half months. After paying $1,800 toward the $700 loan, they still had not reduced what they owed. When the church stepped in to help them out, they had to pay nearly $1,500 to pay off the loan. That’s $3,300 for a $700 loan in less than five months.
As my organization became known for working on this issue, we began to hear more stories, to receive calls from desperate borrowers and learn of other similar situations from pastors and church members. We heard from a pastor who saw representatives of payday lenders approach adults with disabilities at the local mental health facility and give them loans based on their monthly disability checks. We heard from a pastor in South Dallas who watched as 10 payday and auto title lending storefronts cropped up near his church in a matter of months. The single mother, who took out a $5K auto title loan, has paid $600 a month for a year totaling $7,200 and yet still owes $5K. And the auto title borrower who had her car repossessed after paying over $4,000 towards a $1,500 loan.
When I describe these situations to folks unfamiliar with the practice, their first reaction is often to ask “How can this be legal?” I’ve found that concern for this issue crosses lines that so often divide people; lines of race, religion, ideology and partisanship. People of faith and of no faith can agree, scenarios like these are just flat out wrong.
Unfortunately, the growing amount of research and data show that these scenarios are more common than unusual. Research released by the CFPB in 2013 contained a chart which represents, I believe, the clearest snapshot of the problem. It showed that 75% of all fees generated by these products come from the 48% of borrowers who take our 11 or more loans a year. That is not a business model built on one time, short-term emergency loans as they are marketed to the public and sold to policy makers.
What became clear as we looked deeper into the practice is that these products are not loans in any traditional sense; they are instead self-perpetuating, fee generating devices where there is a perverse incentive at work. The more the borrower fails, that is, has to pay only fees & interest to renew or rollover the loan, or resorts to a new loan after paying off a loan that was unaffordable for them in the first place, then the more money the lender makes. What has been referred to by many as a cycle of debt, is the most profitable scenario for the lender.
I also want to mention the growth in the multi-payment payday loan market. Data in Texas shows a rapid growth in these types of loans over the past few years. Today you can take out a $1,000 loan with a 168 day term. You would then make 12 easy payments, every two weeks of over $245 each. That loans ends up costing $2,700.61. That is a 581% APR loan of nearly six months.
While a loan with fixed payments and an end date may seem like an improvement, at this cost they are not a better product for the borrower. In addition, data now shows that many are refinanced. This shows little regard for their affordability and can create an almost endless cycle of refinance much like the single payment product. These loans are really only a way to guarantee the same amount of fees as a traditional loan rolled over eight times or more.
What has taken place across the country is a systematic and deliberate dismantling of traditional usury laws, to the detriment of working Americans and our communities. While laws and loopholes may be different across states, the products and practices are the same. Efforts to reform these laws will continue at the state level, but many in the faith community are pleased the CFPB has the ability to promulgate regulations nationwide and are eager to see new rules that help create a more balanced marketplace; one that promotes both lender and borrower success.
CBF resources on predatory lending: