It’s the first week of February and Anthony Goytia has already issued his tax refund. It all went to one thing: paying off his payday loans.
“It wasn’t as big as we usually get, so we couldn’t afford everything we wanted. I have two more outstanding payday loans and my wife has two as well. And then we’ll have one installment loan together,” said Goytia, who paid off about $3,000 in loans on 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.
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For millions of Americans, payday — including the day they get their tax refunds — isn’t a day they look forward to. Instead of collecting their hard-earned money, they watch it change from employer to a collection agency.
Since its inception three years ago, the Consumer Protection Finance Bureau has handled complaints from hundreds of consumers who have become 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 payday industry. The agency is expected to use that power to propose new rules to regulate the industry. As part of that process, the agency’s director, Richard Cordray, will appear in Richmond, Virginia, to… a hearing on payday loans on Thursday.
The agency is currently drafting new rules designed to help protect consumers. On the one hand, there are lawmakers and consumer advocates who want to see an end to the predatory payday loans that trap borrowers in a never-ending cycle of debt. On the other hand, there are those who are concerned about what will happen if such lines of credit are shut down for good and the poorest people in the US do not have 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 guarantee the loan, consumers provide lenders with a dated check or information for their bank account. They then either pay off the loan in full within two weeks – usually on the next payday of the consumer, hence the name of the loans – or just pay the interest and renew the loan for another two weeks. Consumers who roll over the loan over and over again can eventually pay no less than 300% interest and benefits over a one-year period.
After one of his other creditors accidentally took out four times more than intended, Jerry Mosley said he and his wife had no choice but to take out a personal loan.
“We didn’t really understand the interest rates because we never had to take out a personal loan and as time went on my wife said to me, ‘When are we done paying these people?’” Mosley said. Even after nine months of trying to pay off the loan, “the balance never seems to go down.”
In Texas, where Mosley has lived most of his life, poor Americans struggle to pay off their debts. It has been illegal in Texas for years to detain borrowers for failing to pay their debt, but some lenders continue to file criminal charges against their delinquent borrowers. A fraction of their complaints have led to arrest warrants and at least six borrowers have served time in prison. according to analysis by Texas Appleseed.
In 2010, approximately 12 million Americans used payday loans, according to the Pew Charitable Trust. The majority of them, 69%, took out the loans to cover recurring expenses such as utilities, rent, credit card bills or food. These borrowers took out an average of eight loans, each of which rolled over within 18 days. While the loans averaged about $375, the interest came in at a whopping $520. The typical borrower spent at least five months a year in debt.
Until now, the agency’s action on payday loans pretty toothless. Of the nearly 1,500 complaints about payday loan abuse received by the agency last year, only 5% resulted in monetary compensation. Another 6%, while not leading to any monetary relief, was resolved with actions such as repairs to the victim’s credit report, according to Al Jazeera America.
Some states, including Ohio and South Dakota, have tried to curb predatory payday loans on their own, but the lenders have only adapted parts of their products to the new regulations. In some cases, those desperate enough to get a personal 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 effort to regulate payday loans across the country will not be thwarted so easily.
“It’s well worth the extra time to make sure what we do isn’t ridiculed by the people who [the rules] just by transforming their product a little bit,” says Cordray, the agency’s directorold Senate Banking Committee in June.
While lawmakers do not dispute the need to regulate payday loans, many are particularly concerned about the impact of the new rules on those who are short on cash and unable to access it through the US banking system.
In 2013, approximately 9.6 million American households did not have a bank account, according to the Federal Deposit Insurance Corporation. A third of unbanked households said that the loss of a job and income were the reasons for closing their accounts. Another 24.8 million were underbanked, with a bank account as well as 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 said they had an emergency and they needed $50 or $100 for a week or three or four days? Where would you advise me to tell them to get that kind of credit?’ Georgia Congresswoman Lynn Westmoreland asked Cordray when he presented the agency’s semi-annual report? to the conference in early March. The congressman pointed out that besides lenders or pawnshops, there are little to no opportunities for people to get small loans quickly.
A solution to this problem has been 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 believe that people need access to credit for those purposes, exactly the kind of thing you’re talking about, emergencies, but we shouldn’t easily tolerate that people keep lending over and over and that they have a lot more to do in the first place. Pay. and they’re in a debt trap,” Cordray told Westmoreland.
As for the CFPB’s proposed rules, “That will unfold and there will be a lot of public input into it,” Cordray said at the hearing.
One thing is clear: the CFPB cannot limit interest rates and fees. What it can do is determine who gets a loan.
“These people, they seem nice. They seem willing, but behind all this they knew better than to give us loans,” Mosley said of the payday lenders. “She didn’t care. They just gave us a loan.”
Under the proposed rules, the agency could require lenders to conduct credit checks on borrowers. In this way, they can ensure that the borrowers can repay the loans they take out. Other measures include placing limits on the number of times a borrower can renew a personal loan or adjusting the length of these short-term loans. The agency finds that more than 80% of personal loans are rolled over within two weeks. About half of them are flipped 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 say to everyone right now: don’t do it. Do not do it. If I had known what I know now about payday loans, I would never have looked their way,” he said. But if he hadn’t taken out that loan, he probably “would have been evicted and our car picked up.”
When Guardian spoke to Mosley, he was working on getting a low-interest loan to pay off his personal loans.
Anthony Goytia, who left his job at Walmart last fall and currently works for UPS, said requiring payday loan borrowers to pass a credit check “defeats the mark.”
“The purpose of people getting a payday loan is because they are desperate for cash and they have to pay some kind of bill and they don’t have the credit to do that,” he explained. “Usually the type of people who get a personal loan are people like me who are broke all the time. We have no credit, I have never bought a brand new car in my life. I have a used car. It does not make any sense.”
Earlier that day, his car had broken down by the side of the road.
He does not regret taking out the personal loans. “You have to do what you have to do,” he said.
Will he ever pay them off? “If I win the lottery,” he said, grinning to himself. At the moment he is in the process of paying off an installment loan that he has taken out with his wife so that their wages are not garnished. As for the payday loans, he thinks they may have already been cashed. The resulting bad credit means nothing to him.
“I can’t buy a new car quickly. I’m not going to buy a house anytime soon,” he laughed. “I don’t need an iPhone or a tablet or anything I need credit for. I survive as I am. I survive without credit.”