Richard Cordray, Director of the federal Consumer Financial Protection Bureau, tells the sad story of a man who, needing emergency car repairs, borrowed $500 from a so-called “payday lender.” After nine months of relentless payments, he had paid out $900, and he still owed another $312.
That is an outrageous rate of return on a simple loan. In most states it would constitute an illegal rate of interest.
To make the borrower’s situation even worse, the payday lender was “authorized” to take the payments directly out of the borrower’s checking account. In these circumstances, banks may be slow or resistant to cancelling that “authorization,” even when the borrower demands that it do so.
Out of desperation, the man in Cordray’s example was trapped by the pitfalls of payday loans. His plight illustrates why Maryland Commissioner of Financial Regulation Mark Kaufman and other state regulators have been doing everything within their power to clamp down on payday lenders, the excessive interest and fees that they charge, and the banks that facilitate their snares for the unwary.
Financial regulators at the state level have been making some progress in protecting the public.
In Maryland, for example, Kaufman has brought legal actions against on-line payday lenders that are offering payday loans without a Maryland lender’s license and charging interest well in excess of our state’s usury cap.
He also is challenging the banks that, wittingly or unwittingly, are helping to make these predatory practices possible.
Kaufman acknowledges, however, that some online lenders are continuing their illegal operations in our state. Here in Maryland and nationally, some of the worst of these financial predators are attempting to avoid regulation by setting up shop on Indian Reservations and overseas while reaching the desperate and unwary through their television sets and even their computers.
Kaufman would be among the first to acknowledge that to fully protect the public state regulators need expanded cooperation and assistance from our federal government.
That is why I have been working with Rep. Suzanne Bonamici (D-Ore.), Sen. Jeff Merkley (D-Ore.) and 30 other Senate and House colleagues ( including Maryland Reps. John Sarbanes and Donna Edwards) to cosponsor and advocate for the SAFE Lending Act of 2013 [H.R. 990, S. 172].
We are determined to assist state-level financial regulators in ensuring that payday lenders cannot use the Internet to violate state-level consumer lending laws. We believe that the SAFE Lending Act would be an important step in the right direction in our continuing effort to combat predatory lending practices.
It would further empower consumers’ control of their own bank accounts, respect the states’ role in regulating lending, help prevent shadow lending, and give both state and federal authorities the tools necessary to combat rogue, Internet-based lenders.
Specifically, the bill would give borrowers greater control of their personal bank accounts by protecting them from payday lenders that now are raiding their accounts through remotely created checks or debit withdrawals.
It would require those lenders to comply with the states’ rules and regulations governing payday loans, assuring that members of the public are not charged interest and fees that exceed usury limits.
In addition, our reform legislation would ban “shadow brokers” from offering these payday transactions, bringing greater transparency to this multi-billion dollar industry.
Finally, we would assure that states can gain the assistance of federal authorities in combating offshore and other illegal online lending activity.
Our goal in proposing this legislation is to better protect the desperate and unwary by bringing the cost of payday loans down to reasonable levels. It is important to note, however, that our legislation would not prohibit these loans altogether.
Maryland, for example, permits annual interest rates up to 33 percent on these short-term loans. Surely, that limit is sufficient for bona fide lenders to receive a fair return.
There is no question that many Americans are struggling and at times need immediate access to credit to meet emergencies or to pay day-to-day expenses. However, if such loans cause them to fall into a deepening cycle of debt from which they cannot escape, the loans are not providing real assistance to those in need.
This is why we have concluded that the “access to credit” argument advanced by lobbyists for payday loans is a red herring. As elected representatives, we have a duty to do all that we can to protect the public from this financial peril.
Whether the Republican-lead House of Representatives will agree that our proposed assistance to state regulators is needed remains to be seen. They should understand, however, that these payday lending practices are placing all financial institutions, both the legitimate and those that are illegal, in an unsavory public light.
As a nation, we must do much better in assuring that every American can obtain the short-term financial assistance that they need – without being enticed into traps for the desperate and unwary.
Congressman Elijah Cummings represents Maryland's Seventh Congressional District in the United States House of Representatives.