Tom: Good morning, Mellody. You have a very important topic for us this morning – payday loans.
Mellody: It is a very important subject, Tom. Making sure that we talk about payday loans and other predatory lending schemes is crucial, because they are built to prey upon the most vulnerable individuals in a community. With the promise of easy access to cash for anyone, regardless of credit history, the industry is built on the backs of the working poor, and those experiencing bouts of financial distress.
Tom: So let’s start off by defining predatory lending.
Mellody: By definition, predatory lending is lending that benefits the lender, not the borrower. It consists of any lending method that ignores or actively hinders the borrower’s ability to pay the loan back, by imposing unfair or abusive loan terms on a borrower.
These lending tactics often try to take advantage of the borrower’s confusion or lack of understanding about loans, terms or finances in general. But predatory lending also encompasses any practice that convinces a borrower to accept unfair terms through unscrupulous actions for a loan that a borrower doesn’t need or doesn’t want. Predatory lenders tend to target individuals who are poor, elderly, or less educated, as well as minority and immigrant communities.
Tom: That really is awful. Is the government doing anything about this?
Mellody: For years, many states and cities have tried to rein in these payday loans and other predatory lenders that are a $46 billion a year industry. The industry is a slippery target, however. Using loopholes and exploiting the grey areas within these regulations, many of these lenders have been able to slightly shift their practices or alter their products in a minor way in order to get around state laws targeting them.
However, we have seen things look up recently. In March, for the first time, the federal government has jumped into the ring to try to place limits on these lenders.
Last month, the Consumer Financial Protection Bureau, released draft rules that are expected to curb the number of loans, address credit backed by car titles and some installment loans that have lifespans beyond the traditional two-week payday loan.