“Missouri has more payday lenders than McDonalds, Walmart and Starbucks stores combined,” said St. Louis Alderwoman Cara Spencer (20th Ward).
“Our state allows lenders to charge up to 75 percent on a two-week loan, the highest rate cap in the country, resulting in an average annual percentage rate (APR) of over 450 percent. Payday lenders target low-income communities, often trapping customers in cycles of debt that perpetuate for years.”
In response, Spencer – who also serves as the executive director of the Consumers Council of Missouri, a consumer advocacy non-profit focused on issues of fair personal finance and other consumer issues – has introduced a new bill to the St. Louis Board of Aldermen.
The bill would require payday lenders to apply for a $10,000 permit to operate within the city. Revenue from the fee would be used to oversee new regulations and ensure that lenders are following rules. Those regulations would require payday lenders to post onsite APR information and provide information from the St. Louis Treasurer’s Office about alternative financial assistance and lending.
Excess funds could be used to re-invest in low income communities through existing programs such as Healthy Home Repair.
The bill also would strengthen existing zoning regulations, including restricting payday lenders from operating within a mile of another payday lender, and will allow for more oversight and inspection. It also would require that lenders adhere to a “Good Neighbor Policy” that restricts signage, hours and sale of drugs and alcohol onsite.
Spencer noted that this bill comes as the Consumer Financial Protection Bureau (CFPB) announces a new federal rule regarding lending. In introducing these rules, CFPB Director Richard Cordray acknowledged the limits of federal regulation aimed at encouraging states and local governments to partner with the CFPB to rein in this predatory industry.
“At the heart of this proposed rule is the reasonable and widely accepted idea that payday and car title loans should be made based on the borrower’s actual ability to repay – while still meeting other basic living expenses,” Mike Calhoun, president of the Center for Responsible Lending, said of the new CFPB rule.
“Currently, the loan’s business model allows for lenders to seize money directly from a borrower’s bank account. Lenders easily and directly collect loans regardless of whether borrowers can afford the full repayment without defaulting on other expenses. Similarly, with car title loans, lenders threaten repossession of a borrower’s car to coerce repayment.”
Calhoun noted that payday lenders collect 75 percent of their loan fees from borrowers with more than 10 loans per year. These high-cost, unaffordable loans lead to a cascade of financial consequences, such as overdraft fees, bankruptcy and loss of bank accounts.
“Data consistently show that these loans typically ensnare people into debt traps,” Calhoun said. “The billion-dollar revenues generated from these loans are premised upon borrowers’ inability to pay and the resulting lucrative turnstile of debt created with every loan renewal.”
However, Calhoun said, the new rule contains significant loopholes that leave borrowers at risk. These include exceptions for certain loans from the ability-to-repay requirement, and inadequate protections against “loan flipping” – putting borrowers into one unaffordable loan after another.
“The rule’s ability-to-repay test provides an exception for about six short-term payday loans annually,” Calhoun said. “That’s six too many. Even one unaffordable loan – much less six – can cause significant harm to borrowers, impacting their ability to manage other expenses and keep their bank account in good standing.”
He said the rule also permits exceptions for certain long-term loans that could ultimately overburden borrowers with unaffordable debt. Further, the protections against flipping borrowers from one short-term loan into another have been cut in half since the preliminary proposal last year.
“This change increases the possibility that lenders, by combining ‘exceptions’ and other rules, could still keep borrowers in 10 or more 300-plus percent interest short-term loans in a year,” Calhoun said.
Calhoun said the final rule should apply ability-to-repay requirements to every loan; increase protections against loan flipping; and be broadened to cover any loan that enables lenders to coerce repayment from borrowers.
