The Springfield City Council passed a resolution Monday stating proposed federal guidelines to regulate pay day lenders aren’t stiff enough.
Bob Perry with University Hope ministry in Springfield says the move reflects an effort to address the city’s ongoing problem with acute poverty. “They’ve identified these payday loans as one of the things that helps trap people in poverty. As Springfield continues to develop this poverty initiative to try to help lift people up, then obviously the Springfield leadership is going to want something done about payday loans.”
Monday night, the council heard from members in the faith community who spoke about people who are in financial crisis after taking out too many loans.
Kelvin Simmons with the trade group American Financial Services Association says payday loans are troublesome because of their structure and high interest rates. “Often if one cannot pay at the end of the term, which is usually two weeks, the loan is then refinanced” said Simmons. “Because of the structure of the loan, the loan has to be paid in its entirety at the end in a balloon payment. And when most people can’t make that payment, it continues to get refinanced. That cycle continues, and that’s usually what gets people in trouble.” Simmons notes people often complain of being caught in what’s called the “cycle of debt”.
Perry with University Hope says people can get to the point where they’re only paying fees on the loans. “One lady calculated that she had paid out $6,000 in interest over three years, and still owed the original amount of the loan.”
Simmons says low income people who get in a financial bind after taking out multiple loans are aware of the high interest rates charged by lenders going in. “The get the paper work that states the interest rate” said Perry. “But it was somebody, for example, who’s working at a minimum wage job and their car breaks down. They’re going to lose that job if they can’t come up with $400 to repair the car. Having no options, otherwise, they go to a payday or a title loan and get trapped.”
With a title loan, a person who owns a car outright will give their title as collateral to obtain a loan. In this type of arrangement, the title lender holds the car title until the loan is paid off. Perry refers to payday and title loans as “predatory”.
The Springfield City Council voted 7-1 Monday night to send a letter asking the Consumer Financial Protection Bureau to strengthen payday lending rules. The agency has proposed requiring lenders to determine if borrowers can pay back loans after taking out six of them. The council’s asking for such scrutiny to begin with the very first loan.
Clouding the picture is the uncertain future of the Consumer Financial Protection Bureau (CFPB) itself. Some Republicans in Congress have been critical of the agency, saying it should be dismantled. GOP House Speaker Paul Ryan tweeted recently, “The CFPB supposedly exists to protect you, but instead it tries to micromanage your everyday life”.
The agency was created in 2010 at the urging of then President Obama appointee Elizabeth Warren, who is now a Democratic Senator from Massachusetts.