May 22, 2019
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Payday lenders prey on vulnerable Mainers. Robust federal rules can curb these debt traps.

George Danby | BDN
George Danby | BDN

If you Google “loans,” you will trigger a bombardment of advertisements for something the lending industry calls “e-loans.” Some of these websites claim “Approval in Two Minutes Online,” “Online Loans Radically Simple” and “Bad credit? Apply anyway.”

Nothing about these loans is either simple or creditworthy. They are predatory, and in Maine they are often illegal.

They may sound good, but as millions of Americans have discovered to their dismay and regret, these quick-turnaround loans rapidly spiral out of control. One loan leads to another ( on average 10 per year), missed payments rack up crushing fees, the lenders deluge them with intimidating and threatening messages, and families lose their bank accounts, their credit rating plummets or, worse, they go bankrupt.

Whether accessed online, by phone or at a strip mall storefront, such short-term, high-interest lending instruments are called payday loans because in the past a worker borrowed money from a “ salary lender” or through an advance on their paycheck and repaid it from their next week’s wages.

Payday lenders rarely check an individual’s credit rating and, unlike banks or mortgage companies, they do not verify a borrower’s ability to repay the loan. To receive the loan, you must give the lending company your bank account details, both for the promised quick deposit but mainly for repayment. When payments are due, lenders automatically withdraw the funds you owe whether you have money in your account or not, leading to costly overdraft penalties.

Lenders claim payday loans are good for families who need a temporary helping hand. They cite a middle-class family facing a one-time, short-term emergency expense, such as a car repair. The borrower takes out the loan, pays it back two weeks later, and he or she is relieved of the emergency and the debt.

But it is not middle-class borrowers who mostly use payday loans. The vast majority of quick loan borrowers are senior citizens, members of our armed forces, minority families, women who are heads of households, and other vulnerable working poor individuals and families living on the brink. And these borrowers customarily use their high-interest loan not for emergencies but to pay for ongoing household goods and living expenses.

Payday lenders and their supporters argue their quick loans offer access to credit no other lenders will provide. This is illegitimate reasoning. People who can’t repay their loan and repeatedly flip one loan into another are not amassing credit. Predatory loans only put them into a position where they can’t pay the loan back, perpetuating bad credit or destroying good credit if there was any with which to begin.

Maine is a consumer protection leader. Our state laws limit finance charges and cap interest rates at 30 percent, compared with 300 percent to 400 percent that predatory lenders often charge in states that don’t regulate payday lending.

Maine requires that lenders be licensed and post a $50,000 surety bond. This allows the state to file a claim against a company to recoup costs on behalf of a consumer the company has financially harmed. And lenders are subject to compliance audits.

One of the penalties for companies that do not comply with Maine’s licensing laws is forfeiture of loan interest. Unlicensed companies doing business in Maine can collect only the original loan principal from a borrower.

Still, there are thousands of illegal payday loans issued to Maine consumers every year by unlicensed online lenders. They are hard to find to enforce Maine’s licensing requirements. They scam consumers unaware of the laws every day. Some lenders even claim that Maine laws don’t apply to them.

The federal Consumer Finance Protection Bureau has proposed regulations to prevent predatory lending practices. The bureau would require lenders, like other financial institutions, to verify that a borrower has sufficient net income (after expenses) to repay the loan without having to take out another loan. The bureau’s rules would limit the number of payday loans a person can take out in a year. And they have proposed that lenders must wait 60 days before issuing a second or third loan to a borrower.

But the payday lending industry is strong and knows how to influence the system. They have spent millions lobbying Congress and donating to election campaigns to influence legislation to slow or stop regulations like these that they don’t like.

Let’s stop these lenders who are preying on Maine’s seniors and low-income families once and for all. I urge Consumer Finance Protection Bureau to carefully and effectively regulate these loan sharks.

Lee Webb is a senior policy fellow at the Margaret Chase Smith Center at the University of Maine.



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