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Friday, 27 March 2015 07:20

Federal Government Finally Pays Attention to Legalized Loan Sharking: Payday Loan Stores

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MARK KARLIN, EDITOR OF BUZZFLASH AT TRUTHOUT

apaydayl(Photo: Jason Comely)

If you do not know it, payday loan stores are a legalized loan sharking industry that is now a $46 billion dollar industry, according to National Public Radio. The business preys upon the poor by offering relatively small loans based on an individual showing a paycheck stub.

However, the majority of borrowers aren't able to pay the money back when it is due and the small "stores" that look like currency exchanges start to charge interest rates on the loans that can run into the three digits in the many states where they are unregulated. NPR cites these compelling statistics:

In fact, repeat borrowers are the heart of the payday business. Government researchers found that 4 out of 5 payday borrowers had to renew their loans, typically before their next paycheck. And 1 in 5 renewed at least seven times....

The interest for poor borrowers often far exceeds the original loan in just a matter of weeks, while people of extremely limited means who wanted to avoid debt fall deeper into it. 

The website SFGate.com offers one egregious, but not uncommon example, of how the usurious practices and deplorable effects of this cycle of debt - which results in enormous profits for the payday loan industry - impacts those of limited economic means: 

Wynette Pleas of Oakland says she endured a nightmare after taking out a payday loan in late 2012. A 44-year-old mother of three, including a blind son, Pleas borrowed $255 to buy groceries and pay the electricity bill. 

But as a part-time nursing assistant, she worked only limited hours. Pleas told her lender she'd be unable to meet the loan's two-week deadline. The lender then tried to withdraw the repayment straight from her bank account even though Pleas lacked the funds. The result: A $35 overdraft fee and a bounced check.

After the incident was repeated five more times, Pleas said the bank closed her account.

Collection agencies began phoning Pleas and her family. About six months ago, she learned that the $255 loan had ballooned to a debt of $8,400. At that point, she faced the possibility of jail.

Traditionally, few states have regulated payday loan practices and the federal government hasn't weighed in at all. However, the Obama administration - through the Consumer Financial Protection Bureau (that was designed and promoted by Elizabeth Warren) - is finally proposing to create national regulations, although modest ones, on payday loan stores.

The Associated Press confirms that the Bureau is breaking new ground:

The Consumer Financial Protection Bureau proposed rules Thursday to protect Americans from stumbling into what it calls a "debt trap." At the heart of the plan is a requirement that payday lenders verify borrowers' incomes before approving a loan.

The government is seeking to set standards for a multibillion-dollar industry that has historically been regulated only at the state level. 

"The idea is pretty common sense: If you lend out money, you have to first make sure that the borrower can afford to pay it back," President Barack Obama said in a speech in Birmingham, Alabama. "But if you're making that profit by trapping hard-working Americans into a vicious cycle of debt, you've got to find a new business model."

It's predictable that the legalized loan shark industry opposes the Consumer Protection Bureau regulations, as SFGate reports: 

The payday industry warns that if the rules are enacted, many impoverished Americans would lose access to any credit. The industry says the financial protection agency should further study the needs of borrowers before setting additional rules.

The exploitative irony is that the payday loan industry (which some big banks profit from through financial relationships to the lenders) further impoverishes people living on an economic empty tank. It profits exorbitantly from increasing the financial debt of those in dire need of funds.

Cannot be reposted without permission of Truthout