On January 22, 2015, Maranda Brooks stands outside a payday loans business that she frequented in the past in Cleveland, Ohio. SOURCE: AP/Tony Dejak
Washington, D.C. —(ENEWSPF)–June 9, 2015. Millions of financially vulnerable Americans take out high-cost, predatory loans each year. These loans have interest rates so high that borrowers may never be able to pay them back, trapping many borrowers in an unending cycle of debt. A new issue brief released today by the Center for American Progress examines high-cost lending and the challenges it poses to vulnerable families and outlines the faith-based case for responsible lending practices. The brief also offers policy recommendations to tackle predatory lending practices at both the federal and state levels.
About 12 million Americans—mostly those who earn less than $40,000 per year—take out at least one payday loan annually. While approximately 55 percent of all payday loan borrowers are white, individual white borrowers are less likely to take out a payday loan than borrowers of color. In particular, African Americans are more than twice as likely to take out a payday loan relative to other groups.
While some borrowers are able to pay back their loans on time, most find that the loan intended to solve their problems only made them worse. The annual interest rates on these loans are often in the triple digits: 391 percent annual interest is a fairly typical rate. Moreover, the Consumer Financial Protection Bureau recently found that four out of five payday loan borrowers could not pay back their loans in full when they came due and instead had to borrow more money or refinance their existing loans.
“Predatory lending practices often trap struggling borrowers by exploiting the financial shortfalls of vulnerable families and communities,” said Joe Valenti, Director of Consumer Finance at CAP. “Through exorbitantly high fees and short repayment periods, these dangerous, high-cost loans often set borrowers up to fail and can push borrowers into deeper and deeper debt.”
Beyond the economic implications of predatory lending practices, extracting unfair profits from vulnerable communities is an immoral practice. As CAP’s new brief highlights, religious groups, including interfaith coalitions, are a powerful voice against exploitive lending practices.
“In many ways, communities of faith have been at the forefront of putting pressure on policymakers to better protect vulnerable communities from predatory lending practices,” said Claire Markham, Outreach Manager for the Faith and Progressive Policy Initiative at CAP. “There is wide consensus across faith traditions that we have a moral obligation to protect consumers—particularly those in vulnerable communities—from unregulated and abusive lending practices.”
To help reduce the serious consequences of high-cost lending for families and communities, CAP’s issue brief outlines the following recommendations:
The Consumer Financial Protection Bureau should propose a strong payday lending rule to eliminate the worst practices of payday lenders.
Congress and the states should pass legislation that caps annual interest rates at or below 36 percent, inclusive of all fees, in order to rein in high-cost lending.
Financial institutions, with support from the faith community, should be encouraged to offer affordable alternatives to predatory loans that help families in financial trouble.
Read the issue brief: Responsible Credit Is an Economic and Moral Issue by Joe Valenti and Claire Markham