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Contrary to the CFPBs paternalistic claims, most payday loan borrowers are aware that it may take them more than two weeks to repay the credit they take out.
September 22 -
American banks long ago deserted their most impoverished communities. Today, post offices are uniquely well positioned to serve the underbanked population and perhaps reinvigorate a culture of saving in the process.
September 24 -
Kelly Cochran has vetted every rule that comes out of the agency, making her one of the most influential people in the financial services industry.
September 22 -
Small installment loans with monthly payments limited to 5% of a borrower's income offer a way for banks to serve low-income customers' credit needs while turning a profit.
September 16
American Banker recently published a
Payday lenders often pull payments directly from a borrower's checking account as soon as they get paid, so by the end of the month most people cannot pay off their loans and cover their normal living expenses. They end up taking out loan after loan to cover the difference at the end of the month, falling into a swift downward cycle of debt.
Borrowers feel trapped because they are faced with two terrible choices: take out another exploitative loan because of the shortfall created by the first loan, or face a range of catastrophic consequences associated with defaulting.
These predatory payday loans are misleadingly marketed to cash-strapped borrowers as a one-time quick fix for their financial troubles. In my work representing California's 38th congressional district, I have seen the real-life impact these loans create on hardworking men and women struggling to make ends meet.
If we can look beyond lawyerly semantics, we can easily see most payday, car title and installment loans are carefully designed to trap borrowers in debt and maximize profits.
In response to these troubling statistics the federal Consumer Financial Protection Bureau is considering rules to curtail these abuses. The payday lenders are mounting a full-court press to prevent the adoption of strong rules that would end the exploitation of borrowers.
As in many other financial transactions, there is a difference in the level of knowledge between the lender and the borrower. In mortgage lending, for example, there are firm rules in place that prevent lenders from signing borrowers into ruinous loans they will not be able to repay. An "ability to repay" standard that confirms payday loan borrowers can actually repay the loans they are taking out is a completely reasonable consumer protection. It should be included in the CFPB's rules because it will make it much more difficult for lenders to trap borrowers in debt. I also hope the bureau will consider stopping the debt cycle by putting outer limits on the amount of time that people can be stuck in unaffordable debt, such as the FDIC's guidelines of 90 days.
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Linda Sánchez, a Democrat, represents California's 38th district in the U.S. House of Representatives. She serves on the House Ways and Means Committee.