North Carolinians can be forgiven if they haven’t thought a lot about the predatory “payday lending” business in recent years. Indeed, it was one of the great accomplishments of our state government in the early part of the last decade when it officially ended North Carolina’s four-year experiment with the business and made these inherently predatory loans illegal. The last of the payday shops was chased out of the state in 2006.
Since that time, there have been periodic efforts to bring the practice back into North Carolina, but consumer advocates have repeatedly succeeded in beating them back. A few years ago, an Alabama bank attempted to exploit a loophole in federal law that allowed banks to evade state usury caps and reintroduce a form of payday lending into the state. Amidst sustained protests, however, the bank backed down and North Carolinians have since remained blessedly free of this deceptive and destructive “product.”
Impending federal action
New developments on the subject at the federal level, however, are definitely something to which North Carolinians should pay very close attention in the coming days and weeks. As we reported last summer, the federal Consumer Financial Protection Bureau has been developing new rules to regulate payday lending (and its close sibling, “car title lending”) on a national basis. Now, the new rules are imminent and are expected to be formally unveiled for public comment next Thursday June 2nd. This is from a statement issued last week by the good people at the Center for Responsible Lending (CRL) that explains what these loans are about:
“The rule is likely to cover two major categories of loans, which carry average costs exceeding 300% APR:
- Payday loans, meaning that the lender takes payment directly from the borrower’s bank account on the borrower’s payday. These include:
- Short-term payday loans (defined as loans 45 days or less): These are typically due in full on the borrower’s next payday. Fourteen states plus the District of Columbia prohibit these loans by enforcing rate caps of about 36% annually.
- Long–term payday loans (defined as loans longer than 45 days): These also carry triple?digit interest rates and carry terms anywhere from 46 days to years. In important ways, the longer loan term makes these loans more harmful than short?term loans, not less.
- Car title loans, meaning that the lender takes access to a borrower’s car title as collateral and can threaten repossession of the car to coerce payment. Like payday loans, these loans can be structured as short?term or long? While these loans are illegal in a majority of states, there is a significant car title loan presence in 23 states.”
In general, the issuance of new rules is clearly a good thing. As the CRL statement also observes:
“Given this extraordinarily high cost and extraordinary leverage – control over the borrower’s bank account and/or ability to repossess the borrower’s car – payday and car title lenders lack the incentive to make loans that borrowers have the ability to repay while affording their other expenses. In fact, lenders have just the opposite incentive: They make more when they can trap borrowers in unaffordable debt for extended periods of time. Then they grab the payment from the borrower’s account on payday, leaving the borrower unable to pay rent or another basic necessity, and flipping the borrower into another loan.
This is the debt trap, and it is the core of the business model. According to the CFPB, over 75% of payday loans are made to borrowers with more than 10 loans a year. Research shows that the typical car title loan is refinanced 8 times. This debt trap extracts billions of dollars annually from people with an average income of about $25,000 and leads to a cascade of financial consequences like bank penalty fees, delinquency on other bills, and even bankruptcy.”
In the states where the loans are legal, therefore, tough federal rules will protect thousands – if not millions – of consumers from exploitation.
A potential problem for NC?
As we also noted last July, however, the feds need to be careful about how they go about crafting these rules:
“One sizable potential problem with the effort, however, involves states like North Carolina that have already had the good sense to ban the predators outright.
According to consumer advocates, if the feds aren’t careful in how they draft the new rules, they might conceivably legalize payday loans in places like North Carolina even as they’re cracking down on it in other states.”
In March, a group that included scores of North Carolina nonprofits wrote to CPFB Director Richard Cordray to ask for a rule that protects North Carolina. This is from that letter:
“We appreciate the Bureau’s efforts to curb predatory payday lending by crafting the first-ever federal payday lending rules, and we recognize that this is not an easy task. Since the Consumer Financial Protection Bureau (CFPB) is prohibited by statute from setting an interest rate cap, by far the best way to regulate high-cost lending, it is extremely important that we protect and maintain our North Carolina interest rate cap. Though we understand that a national CFPB rule would not preempt our stronger state interest cap, weaknesses in the rule would present a direct threat to these state consumer protections by lending undeserved legitimacy to predatory practices….
If the CFPB, the federal regulator charged with assuring that financial services are fair, issues a rule with significant weaknesses, it will be putting a government seal of approval on 400% payday loans, both single- and multi-payment. Payday lenders desperately want to re-enter the North Carolina market and a weak national rule could provide the ammunition they need in their fight to overturn our state laws.”
Where things stand
No one knows what the new proposed rule will say exactly, but consumer advocates are hopeful that the CPFB will propose a strong regimen that curbs abuses in the states where payday loans and car title loans are legal while preserving the right of states to ban the practices (as North Carolina does) outright.
Those who care about keeping North Carolina free from these predators (as well as the national effort to combat them) would do well to pay close attention in the days and weeks ahead. N.C. Policy Watch will be following the issue closely and is in the process of planning an upcoming Crucial Conversation luncheon on the topic. We’ll also be providing information about opportunities for nonprofits and ordinary citizens to comment on the proposed rule.