Market your loan as a one-time quick fix, charge 300-400% interest, and dig borrowers into a hole they can’t climb out of – it’s the payday lenders’ business model. We’re talking about an industry that generates 75% of its $3.4 billion in annual revenues from borrowers who get stuck in a long-term cycle of debt. “You borrow money to pay for the money you already borrowed” is how President Obama described the routine in a speech at Lawson State College in Alabama last week. Loan fees usually end up exceeding the amount of the original loan. (Car-title lenders play a similar game, to the tune of close to another $5 billion in annual revenues.)

But now, finally, there’s a real chance to end this debt trap. The Consumer Financial Protection Bureau – the agency conceived by Sen. Elizabeth Warren and created in response to the financial and economic meltdown of 2008 – is preparing to regulate abusive payday, car-title and installment lending, and it has put out a promising first look at the rules it has in mind.

Send a resounding message to the CFPB and Director Richard Cordray: End the debt trap. Tell lenders to issue sound loans that people can actually afford to repay.

Now that we have seen a rough outline of the Bureau’s thinking, the real battle begins. The initial proposal, while strong in some ways, includes worrisome gaps that could allow triple-digit-interest lenders to skip the essential process of verifying a borrower’s ability to repay. We need the CFPB to close this loophole before it puts out a final rule. Meanwhile, payday and car-title lenders will be fighting back hard – pushing to make the rules weaker or narrower, and doing all they can to undermine the authority and funding of CFPB itself.

Experience in the states tells us to demand strong, evasion-proof rules. State after state has tried to crack down predatory small dollar-loans, and too often the lenders have figured out a way to keep their abusive business model going. We must not allow that to happen again.

Tell the CFPB to leave no loophole unclosed: no “seal of approval” for triple-digit interest debt trap loans.

Together we have won and defended a CFPB willing to take on tough jobs like this one. Together we can keep pushing, and end the payday and car-title debt trap once and for all.

Sincerely,

Lisa Donner
Americans for Financial Reform