On Thursday, October 5, the Consumer Financial Protection Bureau (CFPB) issued a rule that will reduce the harms of payday lending in Indiana. On a press call Friday, October 6, advocates from the Indiana Assets & Opportunity Network, representatives of faith and military / veterans’ organizations, and a payday borrower spoke in favor of the rule, but noted that the CFPB did not have the authority to change the cost of payday loans. They called on Indiana lawmakers to take further action to lower the interest rate – currently capped at 391% APR.
The Consumer Bureau’s rule requires lenders to evaluate a borrower's ability to repay a payday loan and still meet their basic needs before issuing such loans. The rule also allows lenders to issue a limited number of loans to a borrower if they choose not to conduct ability-to-repay tests. This will reduce the cycle of debt that is common with payday loans – the average borrower takes 9 or 10 loans per year, paying over $400 in interest to repeatedly borrow $300. These loans drain Indiana's economy of $70 million per year solely in abusive fees.
The rule provides exemptions; one of which permits lenders issuing conventional payday loans of up to $500 to forgo the full-payment test if successive loans are two-thirds that of the previous loan. While this partially limits potential consumer harm associated with unaffordable loan payments, the fundamental problem of egregious interest rates, coupled with lack of evaluating ability to repay, persists.
The rule is currently set to take effect in 21 months, but advocates anticipate a long fight ahead. The House and Senate will likely try to roll back the rule, putting the financial well-being of working families at risk. Time and again, the industry has leveraged its profits so that it enjoys special privileges. Indiana’s congressional delegation and state lawmakers must prioritize the needs of their constituents, not those of the payday loan industry.
Transcribed statements from the press call can be found below and the full CFPB rule can be found here.
Statements on the CFPB’s Payday Loan Rule
(audio recording available upon request)
Erin Macey, Indiana Institute for Working Families and co-lead of the Indiana Assets & Opportunity Network
After five years of research and stakeholder input, including letters of support from many of us here in Indiana, the Consumer Financial Protection Bureau issued a final rule to begin to address the harms of payday lending. Indiana Institute for Working Families, the Indiana Assets & Opportunity Network, and others on this call have eagerly awaited this important step forward.
The fact that the CFPB’s rule asks lenders to assess a borrower’s ability to repay a loan addresses the fundamental problem with the payday lending model: these loans are made to low- and moderate-income borrowers without regard to their financial situation effectively trapping them in a very costly cycle of debt. The average payday borrower takes 9 to 10 loans per year, paying over $400 in interest to repeatedly borrow $300. Sixty percent of borrowers in Indiana take out a new loan the SAME DAY that their old loan is due–and by the time rent is due, more than 8 in ten have taken a new loan.
While we applaud the CFPB for taking this step and ask that our Congressional delegation support the rule, the CFPB does not have the authority to address the interest rate of payday loans. 391% APR is usury. We now look to our state lawmakers to establish reasonable caps on lending that promote safe and affordable access to credit and keep borrowers out of the debt trap.
Mary Lee McKenzie, former payday borrower from Southeastern Indiana
These businesses promote this as a short term fix, but actually it can become a life time involvement once you do a cash advance and you think you can pay off the loan in two weeks–that just does not happen. Something else will arise and you just pay the fee and try to get through the next two weeks and hope you can pay it off. It continues into a cycle where the fee becomes part of your budget.
Personally, I am a college graduate with a good job. I have been on my job for 14 years. However, I have been divorced for 16 years. My ex-husband did not pay his portion of the debt and it came back on me. He also was always behind on child support and did not pay the other obligations he was required to pay in the divorce. This made it a daily struggle to survive. When one is in a situation and there are children involved, you do what can get you through the moment, the hour, and the day.
Payday loan businesses have gotten me into a mess! They do not meet your short term needs. These businesses become a lifetime ball and chain that will drag a person into a worse financial situation than they were in the day before.
I personally could not have gotten out of this cash advance cycle unless it was someone who cared enough and lent me the money to get out–actually gave it to me. We need to get a control on these cash advances so they don’t allow such large amounts because a person, when they’re in the situation, they will take a large amount thinking they could pay it back and they can’t.
Glenn Tebbe, Indiana Catholic Conference
We’re particularly happy that the government has decided to put some safeguards in here for persons who are engaged in this activity. From the Church’s point of view, the state’s responsibility and purpose is to protect and create the common good. The common good is preserved and protected when people are not being taken advantage of. The situation as it exists now–the model–is such that persons in dire straits or certain kinds of situations go after [payday loans] thinking that it can take care of their circumstances but, in reality, the model itself takes advantage of them. From the Church’s perspective, that’s is a violation of the 7th Commandment.
Usury has been condemned from ancient times on. It was in the Bible and all societies have condemned usury. When you take something from someone–and this is unjustly taking in the sense that you’re taking advantage of their circumstance, you’re taking advantage of their unfamiliarity and unsophistication regarding the financial aspects of [payday loans]–we see this as a harm. It harms the person and it harms their family, and ways that we can protect people from that kind of activity is in the best interest of everyone. So we see this as a positive step forward. In fact, we join others in hoping that caps can be put on interest rates. The rate that this model has at 300–almost 400 percent–is definitely in the category of usury.
Maureen Noe, Indiana Association of United Ways
Indiana United Ways and our 60 local United Ways work closely with community- and faith-based organizations that help individuals and their families reach their potential. Many United Ways fund and support financial stability efforts that help families move from poverty to financial stability.
Through the data released in our ALICE Report, an acronym that stands for Asset-Limited-Income-Constrained-Employed, we know that 36% of Hoosier households are living below the basic cost of living. We know that ALICE households and other low- to middle- income families may turn to alternative financial products in crisis situations when they need to make ends meet. Unfortunately, these products often have fees, high interest rates, and terms and conditions that trap people in a cycle of debt. A short-term financial fix through a predatory product often leaves families with fewer resources to devote towards building assets and reaching financial stability.
Indiana United Ways appreciates the CFPB’s rule to allow additional protections for consumers accessing short-term, small dollar loans. Additional notices before withdrawals, limitations on the number of loans an individual can access, and better assessment of the consumer’s ability to repay are important steps in the right direction. Together with our community partners, we will continue to advocate for safe and affordable financial products for Hoosiers.
Brigadier General Jim Bauerle, Indiana Military / Veterans' Coalition
The Military / Veterans' Coalition of Indiana fully supports the idea of limiting interest rates. I provided an article from the Military Times earlier about some of the ways the active duty military and their families are protected and it’s our intent that should something come forward in the Indiana General Assembly this year to create any loan instruments that would exceed 36% APR, we will fight.
Just like other consumers, veterans and those serving in the Guard and Reserves are consumers and need loans. But loans that have interest rates that high are clearly predatory, and they clearly impact the readiness of units and of individuals to serve our military in peace and in war. Those who have served certainly deserve better treatment, and there are better instruments available to them through the state and through the Department of Veterans Affairs if they have an urgent need for support.
We think anything along these lines is not a good thing to do, and we are against anything that attempts to expand it.
Kathleen Lara, Prosperity Indiana and a leader of the Indiana Assets & Opportunity Network
Our members are based in Hoosier cities and towns of all sizes focused exclusively on long-term community prosperity, helping low-income individuals and families attain economic sufficiency, break cycles of poverty, and address blight and foreclosures.
As you have heard, these high-cost loans trap vulnerable consumers in debt cycles and the effects of this cycle don’t end with the consumer, they have a significant impact on community stability.
Our members are left to try and help consumers repair the financial damage left behind when they were inevitably unable to pay back these loans at exorbitant rates.
Our members watch payday lenders that are almost exclusively concentrated in low-income communities market their products as easy financial solutions and know that consumers seeking a last-resort hand up are instead likely to end in default or bankruptcy.
They watch these products drain $70 million in fees from the low-income communities they seek to support.
They know that the inability for households stuck in high-interest loan debt to pay expenses like rent, transportation, health care, and food directly correlates to the housing instability and foreclosures, bankruptcies, loss of local spending and accordingly, loss of local job creation they work hard to combat.
We provided feedback on the proposed rule and are pleased that the final rule still included important steps forward with regards to considering a consumer’s ability to repay and account withdrawal limits as these are essential to curbing some of the most egregious industry practices. But, as Erin mentioned, the 391% payday lending rate in our state must be addressed if we want to cut down on loan defaults and re-borrowing that destabilizes financially vulnerable households.
We believe more work must be done at the state level to protect consumers from predatory lending products that hinder not only individual, but community prosperity.
Keith Carlson, Pastor, Outreach & Care, Grace Church
The Consumer Financial Protection Bureau’s payday loan rules being proposed are a step in the right direction. This predatory industry needs desperately to be regulated so that injustices are not done to the poor and marginalized in our communities. I would hope that policymakers propose even further regulations regarding both the exorbitant interest rates charged and limiting the total dollar amount they can loan.