Imagine a land with no payday loans. Flashing neon signs advertising “Fast Cash” no longer dot the landscape in low-income neighborhoods and communities of color, and nary a lender is permitted to extract interest rates of 400 percent and up. This is not a far-fetched fairy tale or some long-forgotten history. It was the reality across most of the United States until the 1990s, when financial deregulation and the gutting of state usury laws enabled the payday lending industry to proliferate.
Today, 14 states and the District are essentially payday-loan-free, thanks to strong usury laws that cap interest rates on loans. It’s a swath of the country we have dubbed PaydayFreeLandia representing 90 million Americans, or about one-third of the U.S. population. Experiences in these diverse states belie the notion that usurious, short-term loans are a necessary evil. In fact, these states have demonstrated that the best way to address abusive payday lending is to end it once and for all.
The benefits of residing in PaydayFreeLandia are vast. Thanks to our payday lending ban, New Yorkers preserve nearly $790 million each year that payday lenders and their ilk would otherwise siphon in fees. Across all payday-loan-free states, annual savings exceed $3.5 billion — an estimate that does not even include bank overdraft fees triggered by payday loans or funds drained by abusive debt collection and other economic fallout from payday loans.
While some states, like New York, have always banned payday loans, others have temporarily allowed — and then firmly rejected — payday lending. In 2006, North Carolina became the first state to rid itself of payday lending after previously legalizing it. In Arizona and Montana, payday lenders operated for years until voters had the opportunity to evict them at the ballot box.
We reject the dangerous myth that payday lending must be preserved and simply made less predatory. The notion that people somehow need usurious, short-term loans dominates too much of the payday lending debate and is flatly contradicted by former payday loan borrowers themselves, who report being better off after their states eliminated these debt traps. Similarly, the federal government enacted — and subsequently strengthened — a nationwide interest rate cap of 36 percent for military personnel and their families after determining that predatory lending was harming borrowers, and even undermining military readiness.
If eradicating payday loans is good for these borrowers, shouldn’t all Americans benefit from similar protections?
The Consumer Financial Protection Bureau is finalizing a long-awaited federal rule on payday loans. Although the CFPB lacks jurisdiction to set a federal usury cap, it must use its full authority to issue a strong final rule that ends abusive payday lending once and for all. At a minimum, the watchdog agency must require lenders to determine whether borrowers can afford to repay loans — without exceptions or safe harbors. That common-sense underwriting is even cause for debate, in 2016, shows how deeply payday lenders have warped our political discourse.
Legislators also must act. Sound public policy would shore up and expand responsible lending by community development financial institutions based in low-income neighborhoods and communities of color to serve as an antidote to predatory lending. Fundamentally, payday lending thrives because so many people are struggling to make ends meet. Living wage laws and a host of other measures are needed to address root causes of economic insecurity and inequality.
The stakes could not be higher — certainly for low-income families in states where payday lending is currently unchecked, but also for the 90 million people who live in PaydayFreeLandia. In New York, civil rights and fair lending groups have battled aggressive attempts by check cashers and others to gut our state’s usury law and open the floodgates to payday lending. These fights have for years drained massive public resources and required tireless advocacy by broad-based coalitions — sapping energy and resources that should have gone toward devising policies and programs that advance economic opportunity and justice.
A weak CFPB rule would embolden industry actors that seek to break into payday-loan-free states. Indeed, lobbyists in Pennsylvania have already seized on loopholes in the proposed payday lending rule to claim, disingenuously, that the CFPB has given its stamp of approval to payday-like loans.
Given the ubiquity of payday lending storefronts in many parts of the country today, it’s worth remembering that this industry did not actually exist until relatively recently. The country’s decades-long experience with payday lending has proved to be a costly failure. It’s time to reset the clock. Long live PaydayFreeLandia.