Las Vegas Sun

May 26, 2019

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Short-term loans shouldn’t make finances even worse

They’re called payday lenders, but they might as well be called payday vultures. They’re the quick-loan joints in storefronts throughout the valley who present themselves as the good guys lending emergency cash when times turn tough — the car needs repair, the child needs dental work, the spouse has drained the household account on gambling. “Oh, you can pay us back on your next payday,” the grinning lender says.

But most people don’t, because they’re already living week to week, and there’s no extra money to repay a loan at the equivalent of an annual interest rate that can be in excess of 500 percent. The borrower might be able to pay the interest but can’t pay off any of the principal, so the loan is extended, again and again — or new loans are taken out, in what’s known as the debt treadmill. Once a person has entered the doors of the payday loan joint, he can become trapped in a sticky web of inflating debt.

As observed by renowned public-interest organization the Pew Charitable Trusts, the “lenders’ and borrowers’ interests are not aligned because the profitability for lenders depends on loans being unaffordable for customers.” The lenders make more money when the customers struggle to repay.

And there’s no limit to the interest payday and title-loan companies can charge borrowers in Nevada (payday lenders charge an average annual rate of 521 percent, one of the highest in the country, according to 2014 Pew data). Maybe they justify loan-shark interest by pointing to the number of borrowers who skip out on loans — in Nevada, about half.

Lenders are restricted in the amount of a loan: It can’t exceed 25 percent of a borrower’s monthly income. But for people who spend every dollar on necessities (or addictions), who can afford to pay the interest on a loan, let alone pay off the principal, with their next paycheck? Thus, the debt trap.

Thankfully, the federal Consumer Financial Protection Bureau is sensitive to borrowers who “are being set up to fail with loan payments that they are unable to pay.” And so the bureau is proposing a rule that might bring some relief.

The plan is to require lenders to determine the borrower’s existing financial obligations — living expenses and major financial obligations — and limit the amount of the loan to what the borrower can repay with leftover money on the next payday. Lenders also would have to give borrowers written notice before trying to debit their account to collect payments for certain loans, because repeated debit attempts can generate more fees and make it harder for consumers to get out of debt.

The bureau is accepting public comments on the proposal until Sept. 14. Lenders, of course, are balking at the idea. A statement from the Community Financial Services Association of America, a trade group for payday lenders, said the proposal “presents a staggering blow to consumers, as it will cut off access to credit for millions of Americans who use small-dollar loans to manage a budget shortfall or unexpected expense.” The association also said the feds held a “hardened and biased view of payday loans and how consumers use these products.”

In Nevada’s Department of Business and Industry, George Burns, commissioner of the Financial Institutions Division, sees both sides, given his role to watch over public interests and businesses.

“We get a large number of complaints from borrowers who don’t understand what they’re getting into,” he said. “It’s very difficult to protect people from themselves. ... If they elect to go to a payday lender, they may not realize the noose they’re putting their heads into.”

A regulation that limits payday-loan amounts to what borrowers can afford to repay, given their existing obligations, will be doing everyone a favor, and we look forward to that becoming law.

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