Washington — Elliott Clark was working a shift as a security guard in Kansas City when his daughter called to tell him his wife had broken her ankle in two places.
She would need surgery to implant a metal plate and two screws in her foot.
Over the next six months, his wife rehabilitated at their home while the disabled Vietnam veteran carried the family’s financial burdens on his own. That meant paying $45,000 in hospital bills, in addition to living expenses for his two college-bound daughters, a mortgage, car insurance and home utility bills.
Before long, Clark fell behind on paying his monthly utility bills. To avoid late fees, he went to a neighborhood payday storefront that others in his community had used before.
“I got a $500 payday loan to help pay off my bills,” Clark said. “I had to keep my head above water, but I was still drowning.”
Payday loans have developed a villainous reputation in the consumer finance industry for offering small-dollar loans as a quick fix for cash-strapped consumers and then socking them with astronomical interest rates that average 391 percent annually – a rate usually hidden behind cryptic payment plans. While the product is marketed as a two-week loan, borrowers often struggle for months to payback their loan, with interest charges accumulating.
The Consumer Financial Protection Bureau – a federal consumer watchdog agency created in the wake of the Wall Street reforms of 2012 – found that four in five borrowers rolled over or renewed their payday loans within 14 days. Depending on the number of rollovers, the fees accrued on a single loan can amount to more than the original amount borrowed, and then compound quickly.
On June 2, the CFPB announced a long-awaited set of proposed regulations what would rein in the worst abuses of the payday lending industry. The new regulations would require a lender to evaluate a borrower’s ability to repay loans and eliminate harmful debt collection methods.
“We have made clear our view that the credit products marketed to these consumers should help them, not hurt them,” Richard Cordray, director of the CFPB, said at the event in Kansas City, Missouri where many high-profile payday loan abuses have occurred.
Cordray added that the rules take into full consideration that many consumers don’t have other options for short-term credit, but critics of the proposed rules say that by suffocating the payday industry, those who intend to help financially vulnerable people are only hurting them by removing one of the more viable credit options they have.
Others say the proposed regulations don’t go far enough in protecting consumers.
In Clark’s case, the initial payday loan helped sustain him for a short while. He paid a $25 fee to roll his loan over for another two weeks and was able to pay it off. But paying off the entire balance meant falling behind on bills again.
“I got the first one paid off. Then I took out another one,” Clark said. “It was the only choice I had and over the course of three or four months I had taken out four loans.”
Clark took payday loans out from some of the biggest payday loan chains located in the Kansas City area. In just five years, Clark’s $2,500 debt grew to a staggering $58,000.
Clark’s situation is extreme, but not unique. Of the 12 million Americans who use payday loans annually, only 15 percent pay back the loan within the designated two-week term. And Missouri has seen some of the worst abuses.
From 2013 to 2014, more than 1.87 million payday loans and renewals – with an average annual interest rate reaching 452 percent on an average loan amount of $309.64– were counted in the state. The CFPB is barred from imposing a nationwide interest cap on small-dollar loans, leaving that to state legislatures, which have imposed widely varying standards.
Missouri’s exorbitantly high interest rates can be traced back to 1990 with the passing of Section 408.500 of Missouri’s state law which removed interest caps on unsecured loans under $500, allowing lenders to charge interest rates they deemed appropriate to turn a profit.
According to a report by the Better Business Bureau, the Missouri legislature passed provisions in 2012 that allowed lenders to charge 75 percent interest on loans with two-week terms. That means borrowers could end up paying a legalized 1,950 percent APR in interest over the course of a year.
When consumers take longer than two weeks to pay back their payday loan, it becomes non-amortizing, meaning the interest rates exceed the principal amount so quickly the loan gets too big to pay back.
“The payday loan is designed not to be paid off,” said Molly Fleming, payday lending expert at PICO National Network, a faith-based national organization. “These loans are opaque, obscure and intended to mislead vulnerable people into debt traps.”
Fleming said the proposed regulations must end the debt trap caused by constant rollovers of payday loans by eliminating loopholes and putting “common sense standards” in place.
“Lenders must be required to ensure that every loan, regardless of duration or type, can be paid back affordably,” Fleming said in an interview. “Payday and predatory lenders are morally corrupt and payday lending is an egregious practice. Anything else is selling our families short.”
A spokesperson at the Community Financial Services Association, a trade group that advocates on behalf of payday lenders, said payday loans act as a bridge to get borrowers to their next paycheck and is the least expensive option, especially when compared to fees from bank overdrafts and late bill payments.
But even regulated payday loans with reasonable interest rates can reach exorbitant figures when rolled over f or a full year, said the CFSA spokesperson, and such high levels can only be cured by increasing the number of products and players in the market, something the CFPB regulations has not addressed.
A recent article published by the Small-Dollar Project at The Pew Charitable Trusts addresses some of the shortcoming of the proposed federal regulations.
“The CFPB cannot regulate interest rates so the best way for them to help drive down the costs of loans would be to make it easier for banks and credit unions to enter into the market,” said Nick Bourke, director of the project at The Pew Charitable Trusts.
“If the federal regulators clarified for banks a path for making a safe consumer installment loan, they’d be able to make loans that cost less and save millions of borrowers billions of dollars,” Bourke said.
Bourke added the CFPB regulations are a good thing and that there is time to fix the current proposal.
Fleming is also doubtful the current regulations will eliminate the problem and said some existing lenders will create new products disguised under other names.
Elliott Clark took out five loans, each intended to cover the prior, until he was paying over $500 every two weeks just to keep up with paying each one off.
“I was working myself to death,” Clark said. “If I had been able to go to the bank I could’ve handled it all but the bank wasn’t interested in me because I had bad credit.”
In 2010, Clark’s bank repossessed his home, claiming he had fallen behind on restructured mortgage payments.
“No matter what I did I could not win,” Clark said. “Like I said — quicksand.”
Ultimately, Clark was able to pay his balance off once he received a lump-sum disability check from the Veterans Administration, money which should have gone to helping treat his PTSD. But he never got back his house, and now is forced to rent.
“After I paid it off, any time I talked about it I did cry,” Clark said. “It made me feel how stupid it was.”
Clark is now a vocal opponent of predatory lending and has given talks around the country to appeal to legislatures to enforce interest caps on short-term loans.
“It took me a time to realize I wasn’t stupid,” Clark said. “I’m just trying to get a piece of the American Dream they say you can get if you do the right thing.”