How to avoid financial predators
A report released last year by the Center for Responsible Lending found that, from 2012 to 2016, payday lenders took more than $513 million in fees from consumers in Michigan, with fees and interest that can reach over 340% annual percentage rate (APR).
Such high fees often cause borrowers to enter a debt trap, in which they are continually paying back interest on loans, sometimes on loans that have been taken out to repay other loans.
Such loans are often referred to as “predatory” and “usurious,” and the companies providing them as “fringe banking services.” Such companies are commonly seen in urban and rural communities with low median incomes, including those with high percentages of people of color.
Rural areas, in particular, are vulnerable to payday lending. According to Bridge Magazine, Michigan’s urban areas had a rate of just over five payday loan stores per 100,000 people, but the rate was even higher in rural areas, with more than seven stores per 100,000 people.
Alpena County has one of the higher rates in the state, with 14 stores per 100,000 people, making the high-interest, high-risk loans even more accessible here than in most counties.
The federal cap on the interest that military personnel can be charged is 36%, which leads to the question: If federal lawmakers believe over 36% interest is too high for those in the military, then why is it not too high for the rest of the population?
Thankfully, some Michigan legislators agree, and 37 members of the Michigan House have introduced a bill (House Bill 4251) to cap payday lending interest rates to 36% for all borrowers in Michigan. The bill also requires lenders to determine that a borrower has the ability to repay and that the borrower’s debt-to-income ratio is not greater than 41%. Banks and credit unions are required to determine that borrowers have the ability to repay their loan, but payday lenders have no such requirement.
Unfortunately, sponsors learned that the bill would not get a committee hearing with the 36% interest rate cap. Instead, a substitute will be heard by the House Financial Services Committee today that removes the cap but includes additional consumer protections — a stipulation that borrowers can have no more than one active loan at once and must have a 30-day “cooling off” period between loans.
While the Michigan League for Public Policy and other advocates are disappointed that that the substitute will put limits more directly on borrowers than on lenders and wish that the bill had an interest cap, we also feel that, because of the included consumer protections, the substitute bill is a start and much better than no bill at all.
Added good news is that the bill has sponsors from both parties.
With or without a cap, there will no doubt be heavy lobbying against the bill by industry lobbyists, who will say an interest cap or other reforms will cause their companies to close their doors and that struggling people will not be able to pay their bills due to lack of other borrowing options.
We heard this before, back in 2017, when the industry was trying to expand payday lending without adequate borrower protections.
However, research in Colorado, whose residents recently passed a ballot initiative to cap costs at 36% APR, showed that many borrowers reported being better off without taking out payday loans, either using traditional alternatives (turning to family and friends, selling or pawning possessions, or negotiating with creditors) or newer alternatives, such as short-term loans from credit unions and traditional banks, or employer-based loans.
And with the Consumer Financial Protection Bureau exercising less oversight and restraint over the payday lending industry than it had previously, it is more important than ever for states to follow Colorado’s lead and put limits on the usury of families and individuals with low incomes.
You can help in this effort by contacting your state representative and urging support of HB 4251, especially if he or she is on the House Financial Services Committee. Or, if you live near Lansing or are planning to be in the Capital City today, you can attend the hearing and put in your card of support.
Peter Ruark is senior policy analyst at the Michigan League for Public Policy.