The holiday season is the time of year when people tend to get financially overextended. To meet those expenses, some will turn to payday lenders — a bad idea. Consumers need better protections against this industry and its triple-digit interest rates. Congress and the Defense Department are paying renewed attention to the way payday loans are ensnaring members of the nation's military, but everyone needs to be shielded. If Congress refuses to act, the Consumer Financial Protection Bureau and states like Florida should stop this predatory lending.
Payday lending has boomed since it burst on the scene in the 1990s. According to the Center for Responsible Lending, there are now more than two payday loan storefronts for every Starbucks. These loans are marketed as short-term financial help for borrowers who need quick cash until their next payday. In truth, they are pernicious loans designed to trap borrowers in a cycle of debt at exorbitant interest rates. The average borrower is kept in debt for more than half a year as he or she churns through loan after loan. In Florida, payday borrowers average nine loans a year, with the elderly being a growing share of the industry's customer base. Nationally, annual interest rates for a two-week loan typically range from 391 to 521 percent, according to the center.
In 2006, after news reports that payday lenders were targeting members of the military and their regular paychecks, Congress passed the Military Lending Act to cap interest rates for consumer lending to military personnel at 36 percent. At the time, the Defense Department said predatory lending "undermines military readiness" and "harms the morale of troops." Since then, the industry has found clever ways to get around the cap. For instance, it doesn't apply to loans for more than $2,000 or loans that are for terms longer than 91 days. A recent Senate committee hearing on the issue is spurring action. The department is considering new rules to close the loopholes.
That is well and good, but it still leaves millions of Americans vulnerable to the payday loan industry. Florida law has some window-dressing limits on payday lending that do almost nothing to prevent the industry from taking advantage of consumers. In a 2012 letter from the United Way of Florida and other organizations that serve the state's poor, the CFPB was urged to use its regulatory authority to protect consumers from an industry that preys on consumers' financial naivete. Only 2 percent of payday loan volume is to nonrepeat borrowers.
The CFPB could establish some commonsense requirements such as requiring underwriting to ensure that a person receiving a payday loan can afford to pay it back, and limiting indebtedness to no more than 90 days per year to prevent loan churning. Florida lawmakers could also follow the lead of 17 states and the District of Columbia and put a double-digit rate cap on payday loans. If America's fighting forces need protection from unscrupulous industry practices, why not the rest of us?