Alternatives to Payday Lending Needed

Time and time again, we hear about hard-working families being exploited by predatory, small-dollar, short-term lenders, such as payday lenders. Payday loans are unsecured short-term loans offered at exorbitantly high interest rates that too often force the recipient to roll over their loan continuously because the interest rates quickly amass to debts larger than the original loan. While these loans are meant to help individuals in need of quick cash, far too many times the borrower ends up trapped in a vicious cycle of debt.

Texas’ border region has many hard-working but often financially struggling families, and has been particularly hard hit by the proliferation of these high-cost payday loan businesses. In 2014, these businesses drained $1.5 billion in fees and repossessed 44,000 cars in Texas.

Almost 40 percent of the Texas population is either un-banked or under-banked. These consumers have limited access to standard financial services provided by retail banks and are the most likely to rely on payday lenders for emergency loans to make ends meet.

We sell our families short when we accept that high-interest loans are the best we can do for our communities. Payday and auto title loans, with uncapped annual percentage rates, have long enticed families in moments of desperation — offering short-term fast cash at the cost of long-term debt — at rates averaging 500 percent APR. In Texas, an average $500 payday loan costs an astounding $1,100 or more to repay in a period of just a few short months.

To address these types of abuses, Congress in 2010 created the the Consumer Financial Protection Bureau (CFPB), a federal consumer watchdog agency, as part of Wall Street reform to level the playing field for consumers. In just a few short years, it has returned over $11 billion to 25 million consumers and currently addresses over 27,000 consumer complaints each month.

In fact, the CFPB is working on issuing new regulation this month that will ensure payday loans are structured for successful repayment. Under the regulations, lenders must ensure borrowers have the ability to repay a loan beforehand; or the lenders must comply with limitations. The latter limitations include a cap on the number of short-term loans a consumer can take out: three in a two-month period, followed by a 60-day “cooling off” period, and a limit of six loans per borrower annually. The proposal also would cap annual interest rates for longer-term installment loans and some vehicle-title loans at 36 percent.

Not surprisingly, the CFPB is under constant attack by lenders who use concern about access to credit for low-income families to cloak their push to preserve abusive lending practices. Contrary to assertions made against the CFPB’s efforts, however, the upcoming regulation will not put an end to the availability of short-term credit for low-income families, but rather, will reign in the predatory practices that harm consumers.

I will continue to stand up for South Texans during our upcoming House Financial Services committee hearing, scheduled for Thursday, which will examine the payday lending industry. I believe Congress must fight to safeguard the CFPB’s ability to protect consumers against misguided legislative efforts aimed at thwarting the agency’s rulemaking under the guise of preserving access to credit.

The exciting news is that we are starting to see homegrown lower-cost alternatives take hold in Texas and the Rio Grande Valley. These alternatives offer innovative features, such as low cost interest rates (some with less than one-tenth of the cost of typical payday loans), and payment systems set up through employers. One local loan center has even saved its borrowers over $6 million in a few short years. In one of the poorest communities in the country, these loans are not only less expensive, but help our under-banked borrowers build credit to qualify for lower-cost loans in the future.

There are better alternatives to payday lending that provide those in need with access to credit in a responsible, non-predatory manner. We should embrace these alternatives, rather than protect the status quo of high-interest rates and debt-trap cycles.

Hard-working South Texans should not have to suffer from predatory payday loans. Instead of believing the mantra that 500 percent interest loans is the only way for our families to have access to credit, communities in the RGV are coming together to create better ways. Strong rules from the CFPB, to address market abuses, coupled with innovation to offer loans structured for success is the right path forward.

U.S. Rep. Rubén Hinojosa, D-McAllen, serves on the House Committee on Financial Services. This column was specially written for The Monitor.