Borrower protection thins as payday lending regulations are axed across the nation

Inside Subprime: May 15, 2018

By Lindsay Frankel

Despite the Obama administration’s push to enforce tighter regulations on predatory lenders, the latest political shifts have left payday lending regulation all but in the dust. Richard Cordray, former head of the Consumer Financial Protection Bureau, recently told reporters, “I’m surprised to see any efforts aggressively to roll back efforts to rein in payday lending, because we had done extensive research on how these loans lead many people into debt traps that ruin their financial lives.”

Efforts to remove restrictions on payday lenders have included dropped lawsuits against predatory lenders and halted investigations into disreputable practices. Most notably, the CFPB under Trump appointee Mick Mulvaney has sought to repeal previous payday lending rules that would tighten restrictions on the industry.

Payday loans typically carry triple-digit annual interest rates, with payday loans in Idaho topping out at 582 percent APR, the highest in the nation. These predatory high interest rates often trap low-income borrowers in a cycle of debt, requiring them to take out new loans to cover the cost of interest rates on previous loans. But while payday loan services cause undue financial harm to American workers, there is a high demand for the services that the industry provides. This is because millions of Americans are not served by traditional banking services. For these people – who may have bad credit or no credit and thus cannot access more traditional forms of lending – payday loans can seem like the only option when money is tight.

One of the issues affecting income stability is shift variability for part-time workers. According to the Economic Policy Institute, nearly 15-20 percent of workers have shift schedules that change weekly, and this disproportionately impacts low-income workers. The study found 31 percent of households that had varying income were underbanked when compared to 19 percent of households with dependable, stable income. Workers with shifting schedules lack access to traditional lines of credit due to their financial history, and variation in schedule creates volatile changes in regular pay. This can cause many underbanked individuals to turn to payday loans when they can’t cover their expenses.

One compelling solution is for employers to provide income flexibility, giving employees more immediate access to the money they have earned. As an example, Uber currently provides an Instant Pay feature to its drivers, allowing workers to directly receive their accrued earnings up to five times a day. Providing workers with immediate access to their earnings could prevent individuals from seeking payday loans while waiting for a bi-weekly paycheck to clear.

Another option is for businesses to provide short-term loans as a financial incentive for workers. Low-interest loans could be offered in an amount that is based on the worker’s average earnings and work history. When workers feel provided for by their employers and can depend on borrowing against their own future income, diligence and commitment to work are likely to increase. At the same time, the option to borrow from an employer reduces an individual’s dependence on payday loans as a means of bridging a gap in pay. Last year, Walmart introduced a new app for workers that provides up to eight annual paycheck advances for free, in an attempt to help curb payday borrowing among its workforce. While many praised the big box giant for its efforts, it’s worth noting that the average Walmart employee still makes about $9/hour, a low rate that is likely the reason workers have to turn to predatory payday and title loans in the first place.

Tax breaks and other incentives for businesses could provide the motivation needed for employers to offer these services to workers. Other changes in policy have also been proposed that may reduce the need for payday loans. Senator Kristen Gillibrand recently introduced legislation that would bring banking services to every U.S. Post Office, allowing individuals with bad credit to access short-term, low-interest loans. Tighter regulations on payday lenders, like those that were proposed in the now-suspended 2017 CFPB payday lending rules, would also help to control predatory high interest rates.

While policymakers explore solutions to the payday loan debt trap, borrowers should be aware of the dangers of payday loans and seek alternatives whenever possible.

To learn more about payday loans in America, check out these related pages and articles from OppLoans:

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