Flickr.com/Taber Andrew Bain
As I mentioned in last Friday’s news round up, Petula Dvorak at the Washington Post detailed the story of a man who used a series of payday loans to cover his Christmas expenses –with near disastrous consequences to his family’s long term financial health. After spending $1,500 on the holidays, he used a payday loan to cover his mortgage—but quickly needed another loan to cover the cost of the first—lather, rinse, and repeat. By the end of the piece, he is drinking lemonade forlornly, describing the way his boss helped him avoid paying thousands of dollars in interest and “loan-renewal option” fees. Unfortunately, for many Americans, these stories are not confined to the holiday season (nor do they involve a stroke of luck from a sympathetic employer).
Without the liquid assets to cover short term needs, many families are left stranded with few options to cover their cash flow gaps. As CFED’s Annual Assets & Opportunity Scorecard shows, 43% of U.S. households lack the liquid assets (cash, savings or checking accounts, or other easily accessed funds) to subsist at the poverty level for three months without a source of income. The broad scope of this financial instability makes the widespread use of payday lending fairly easy to comprehend. For liquid asset poor households, any emergency that requires funds to resolve (a necessary car repair, a medical event) can spiral into a longer term debt obligation.
In a March 12th letter to the Director of the Consumer Financial Protection Bureau, Richard Cordray, Senators Merkley and Akaka (representing Oregon and Hawaii, respectively) assert that “payday and other high-cost, small-dollar loans are marketed as ways to cover short-term credit needs [but] are often structured to trap borrowers in long-term debt.” Their letter urges the CFPB to use their authority “vigorously” to “bring order to this Wild West lending market” and to support the work of states who are already engaged in this effort. They identify the internet marketplace, offshore lending, and resurgence of mainstream banks offering “check advances” as areas of scrutiny for the CFPB. The Senators recommend the CFPB work closely with state-level officials to maximize effectiveness of regulation, expand access to affordable credit options within the mainstream financial service sector, and increase financial education opportunities for consumers.
The financial product marketplace presents a number of challenges to the asset building field. On the one hand, financial products can be the building blocks to a financially secure life. But many financial products carry a degree of risk, particularly for low-income consumers who have little “wiggle room” when it comes to their personal finances. As Pamela Chan wrote in a paper this winter, “The process of building up […] savings largely depends on access to an array of financial products and services, such as low-cost and high-quality savings accounts. […] Unfortunately, there are barriers which prevent many families from opening and maintaining savings accounts, such as high minimum-opening deposit, minimum balance, or direct deposit requirements.” [Emphasis mine] Consumers living in liquid asset poverty struggle to maintain or even open accounts with mainstream banks for a variety of reasons. These families’ relationships to payday lenders are therefore complicated: as David Stoesz asked in a 2010 paper, are payday loans “an adaptive response to the credit needs of low- and moderate-income families or predatory exploitation of economically hard-pressed consumers”? The answer can often be “both.”
While payday lending and similar products address immediate financial needs, they introduce a variety of serious financial risks that can ultimately drag families into cycles of debt that can hurt their chances of moving out of poverty. The CFPB is already equipped to begin addressing Senators Merkley and Akaka’s concerns. This request and concrete list of issues to focus on should help the CFPB move their consumer protection goals forward.