Sally Adams rides the bus home from her second job as a nighttime clerk and—every day—goes by the bright green “Payday Loans” sign. She knows such offers have a reputation as scams, but she also has two kids at home, one of whom has come down with a bone-shattering cough, and she can’t afford his medicine. That green sign becomes more and more tempting every day that she drives by, as her son’s cough lingers in her memory.
What’s more, she gets on the computer and is inundated with yet more advertisements, to the point that she can’t help herself. “$250-$1000 right now—as soon as tomorrow,” they promise. What’s more, most don’t specify the effective interest rate anywhere. Well, so what? Sally doesn’t quite know what the interest rate is, but she knows that having $1000 in her pocket tomorrow would pay a lot of the bills lying around and buy a lot of medicine.
Two weeks later, when her paycheck rolls in, she owes most of it to Paydayloansharks.com, and she finds herself in an even worse situation than before. Not only is the $1000 used up on groceries and medicine, but she has no money from her recent paycheck, setting her two weeks further behind. (But maybe another payday loan would help her bridge the gap—and so the vicious cycle begins.)
Valuable to many and a safety net to millions more, predatory loans are around to stay. But good news: Our new friends at the Consumer Financial Protection Bureau—for the first time—will be taking a good hard look at what is legalized “loan sharking” and put a national enforcement strategy together for policing these practices. The Consumer Financial Protection Board is not playing games. Last week, Director Richard Cordray began to announce its domain. The rules propose to govern almost two-thirds of debt collection agencies and over 90% of the United States’ credit reporting agencies, two industries which have never faced governmental regulation before. The companies would be subject to stricter guidelines and greater scrutiny.
While it’s been a long task, it seems President Obama found the right person to lead the Bureau. Cordray is unabashed and blunt, and has wasted no time cracking down on the industries that prey on the members of society with fewer options. We can only hope that Richard Cordray and his team will get it right; balancing the interests of those who sadly live too close to the edge of poverty (“paycheck to … maybe another … paycheck”) and companies who are willing to make high risk loans.
At a minimum, the CFPB should require disclosures of the risk and the actual interest rate, and provide information on their website about the realities of taking out a payday loan. That way the Sallies of the world will at least have the requisite information to decide. Information is power.
Assisted by David T. Martin