A Public Alternative to Payday Loans

In early February, the Consumer Financial Protection Bureau announced plans to rescind a rule requiring payday loan lenders to accurately assess whether borrowers can repay them. The Obama-era regulation was meant to curtail some of the short-term loan industry’s notoriously predatory practices.

In recent years, the once-niche industry has exploded into a $46 billion behemoth with more than 20,000 lenders. Its massive growth has come at the expense of Americans who need cash sooner than it’s coming in — for example, when the rent is due Monday but payday isn’t until Friday.

The loans, typically ranging from $100 to $1,000, are doled out at average annual interest rates as high as 400 percent. In some cases, the rate nears 800 percent.

If loans are promptly paid back, the interest isn’t backbreaking. It is when consumers can’t do so that vulture usury commences.

In such instances, borrowers often pay just the minimum — say, $40 on a $250 loan. This renews (or “rolls over”) the loan but, crucially, does not reduce its principal. The borrower is $40 lighter and owes just as much as before.

A 2014 review of 12 million payday loans by the Consumer Financial Protection Bureau (the same government department now suggesting deregulation measures) found that 80 percent were either rolled over or chased after with separate short-term loans — that is, taking out a payday loan to pay back a payday loan.

When borrowers can’t repay over an extended period, the result can be ruinous. One Kansas City man initially borrowed $2,500 and ended up owing $50,000 and losing his home.

As the recent partial government shutdown highlighted, many Americans have difficulty navigating even the mildest of financial road bumps. A 2017 survey found that nearly four in five Americans live paycheck to paycheck. In February, the Federal Reserve Bank of New York reported that a record 7 million Americans are at least 90 days behind on their car payments.

In the midst of what President Donald Trump in a tweet called “the greatest economy in the HISTORY of America,” it’s clear that broad measures are needed to keep Americans from drowning in a sea of insurmountable debt.

In the short term, we must find ways for cash-strapped citizens to access small-scale, short-term loans without the risk of large-scale, long-term hardship at the hands of predatory lenders.

A recent article by U.S. News & World Report that identified seven ways to avoid payday loans included such bad ideas as borrowing from family and friends and against 401(k) retirement plans. A far better way to go would be widely accessible low-interest loans whose fees are reasonable rather than rapacious.

And the way to achieve this is simple: States or municipalities should create these loan programs.

Publicly funded lending pools can provide low-interest, short-term loans in a way no private lender can or will.

Municipal or state lending programs could incorporate some of the very same consumer viability standards the Consumer Financial Protection Bureau suddenly finds unnecessary under President Trump. They could access a potential borrower’s ability to repay and bar those who default from future loans. Delinquent borrowers could also be fined — fairly, without a $300 loan becoming a $3,000 legal loan-sharking operation.

A decade ago, taxpayers bailed out the entire global banking system. We can manage to lend a working single mom a few hundred bucks until her next paycheck arrives. Low-interest short-term public lending pools are the best possible solution, and should be explored in cities and states across the country.