In a recent piece, Drew J. Breakspear, commissioner of Florida’s Office of Financial Regulation, misrepresented the payday loan product to a disturbing degree, claiming that a new rule put forth by the Consumer Financial Protection Bureau would actually harm consumers.
While I share Mr. Breakspear’s expressed concern for the wellbeing of Florida’s hardworking citizens, I must strongly disagree with his conclusion.
Criticism of payday lenders is well-earned. They have devised a system that rolls customers into one 300% annual interest loan after another, until those customers very often reach a point of serious financial desperation—they may lose their bank accounts and are more likely to declare bankruptcy than non-payday borrowers.
The CFPB, during the course of developing the new rule over several years, documented that these repeat loans are not the exception, but the rule. Payday lenders rely on customers caught in a cycle of 10 loans per year for 75% of their revenue. The product is harmful; there is no gray area here.
Florida’s 2001 payday lending reform was not the panacea we hoped for, not even close. We see the same kind of repeat cycle found in the bureau’s national analysis also happening in our state.
In 2015, over 83% of Florida payday loans went to borrowers stuck in seven or more loans, based on data from the office of the regulator himself. The average annual interest rate is still 278%, and these unscrupulous lenders drain $311 million out of the economy every year, disproportionately affecting African-American and Latino communities and a growing number of seniors.
It is regrettable that two Florida members of Congress, Dennis Ross, R-Fla. and Alcee Hastings, D-Fla., are among those who introduced the legislation that would repeal the CFPB’s rule and prevent a similar rule from being written in the future. Using Congressional Review Act authority to overturn the rule is a rare and radical move: It would undo protections that have been carefully developed to provide relief and protection from exploitive financial practices.
The payday rule would provide great relief to Florida families and to states around the country in which payday lenders push their unaffordable, triple-digit rate loans. The bureau’s rule simply requires payday lenders, with some exceptions, to assess the ability of their customers to repay their loans. While Mr. Breakspear argues this is too burdensome for the lenders, it is nothing more than what most other lenders already do in order to improve the likelihood that the borrower will pay them back.
The payday lenders object because they use other methods of making their money. They target low-income people, often in communities of color, lure them in with the promise of quick cash and charge them huge fees that do indeed amount to triple-digit annual interest—despite Mr. Breakspear’s laborious attempts to camouflage that fact with talk of a single fee for a two-week loan.
Obviously, the annual interest is quite relevant for payday loans, which often create a cycle the borrower is caught in for months or years. The payday lender enforces that cycle by obtaining access to the borrower’s bank account so they can extract the high fees whether the borrower has funds to cover other expenses or not.
In fact, that rule could have been stronger. It could have eliminated some exceptions to the ability-to-repay principle. It could have addressed the longer-term loans that payday lenders are now pushing to get around restrictions; loans that also cause borrowers severe financial harm.
Many groups in Florida have called on the CFPB to issue a strong rule, including consumer, faith, seniors, civil rights and community organizations that recognize the significant harms caused by the predatory practice of payday lending. Some of the groups who wholeheartedly supported the ability-to-repay determination included, among others, local Florida Habitat for Humanity chapters, the Florida Council of Churches, and several Florida legal aid offices.
The bureau is prohibited from setting a rate cap, but Florida legislators are not. Florida legislators could take the matter into their own hands to clamp down on the usurious debt trap, to close the loopholes in Florida’s law, and to cap the rates on the cost of these loans to a reasonable 30% annually, which many in Florida are asking them to do.
Members of Congress should know that if they support the CRA that would repeal the payday lending rule, they are standing against their constituents and with the payday lenders, who wreak havoc in the lives of their targets.
No one should let the smokescreen of false claims by predatory lenders obscure the true nature of this business. Indeed, I would hope that Reps. Ross and Hastings would come to understand the harm this product causes Floridians and reconsider their efforts to roll back the rule. Their bill would disable the progress made in this rule to curb the inequities of current payday lending practices.