The CFPB, a federal agency, has proposed new rules for payday, car title, and high-cost installment lenders.
BUT, they need to hear from consumers- that means you! We have an easy-to-use page where you can weigh in- it only takes a minute and will help bring about important consumer protections with these loans. Please share a line or two in the comments box about why you care about this issue and want to see strong federal reforms.
PS: You do NOT have to be a payday, car title, or installment borrower to sign the petition.
Earlier this week, Liana Molina, director of community engagement at the California Reinvestment Coalition, testified at a field hearing held by the Grand Alliance to Save Our Public Postal Service. The alliance is focused on “the choice now facing the U.S. Postal Service: Build on the heritage of universal, nationwide service and expand to meet the needs of the hi-tech economy and low-income communities – or continue to shrink with declining service, facility closings and job cuts.”
Molina’s testimony focused on a proposal for the USPS to complete with fringe, predatory payday, car title, and other high cost lenders by instead offering safe, low-cost financial services. Her testimony is included below.
Good evening, my name is Liana Molina. I’m the Director of Community Engagement at the California Reinvestment Coalition (CRC). The California Reinvestment Coalition is a statewide, membership based organization working to build a fair and inclusive economy that meets the needs of communities of color, low-income communities, and others who have been marginalized and historically underserved. We use strategic advocacy that leads banks and other corporations to provide investments and financial services that expand access to housing that is affordable, entrepreneurial opportunities, good jobs, and other tools to create and sustain household and community wealth.
Historically CRC has advocated for greater transparency and accountability of the banking industry, and we’ve pushed banks to grow and strengthen their community reinvestment lending, services and investments in low-income communities across California. Today we continue our work to expand access to fair and affordable banking, credit and other financial services and opportunities for underserved consumers.
I lead CRC’s Stop the Debt Trap campaign to reform high-cost payday, car title and installment lending practices. We are employing a multi-pronged approach that entails legislative and regulatory advocacy at the local, state and federal level. Before I delve into the specific policy reforms we are seeking and how the US Postal Service can play an important and impactful role in the struggle against predatory lending, let me share why we got involved in the fight to end predatory payday lending.
Our efforts against predatory payday lending stem from our work to change and improve the mainstream banking sector.
Did you know that every single payday loan borrower is also a bank customer? A consumer needs to have an active checking account in order to obtain a payday loan, since the loan is secured with a post-dated check which is then deposited by the lender on the consumer’s next pay date.
So these consumers are not entirely unbanked. These are people who likely use their bank accounts for direct deposit of their income and to handle other basic financial transactions, such as paying regular bills. Yet, these consumers cannot borrow a $300 or $500 loan from their bank because the banks do not make small dollar loans that meet the credit needs of their clients. So this is one way the banks are part of the problem.
Additionally, many of the big banks are actually invested in payday loan corporations through extending lines of credit they provide to payday lenders, which enable payday lenders to conduct their business. So while the banks aren’t making affordable small dollar loans directly to their customers, they have major credit agreements with payday lenders who then charge these same customers triple-digit interest rates on short-term loans. Banks involved in financing high-cost, low-quality lending through lines of credit and term loans to payday loan corporations include Wells Fargo, Bank of America, JP Morgan Chase, US Bank and others.
Finally, CRC has prioritized our Stop the Debt Trap campaign to end predatory consumer lending because when we talk about the provision of financial services in low-income communities, many economically disadvantaged neighborhoods do not have access to full service bank branches. Instead, these neighborhoods are saturated with fringe financial entities such as check cashers, pawn shops and payday loan outlets, all of which strip the income and assets of consumers struggling to make ends meet. We also know that payday loan stores are more likely to be located in African-American and Latino neighborhoods than in white neighborhoods.
Given this landscape, there is room for a lot of improvement in how our financial system meets the credit and capital needs of low and moderate-income consumers. While CRC agrees that there is a legitimate need for access to credit, debt trap products like payday, car title and installment loans (which are basically payday loans on steroids) do not help people over the long-term.
In California, the interest rate on a two-week, $300 payday loan is 459% APR. It amounts to $15 per $100, or $45 to borrow $255. It may not seem so bad at the face value, and most consumers can afford to pay $45 for a $255 loan. However, payday loans require a balloon payment of the full $300 at the borrower’s next pay date, two-weeks later. Most borrowers do not have $300 to pay off the debt without having to re-borrow. So unless the borrower has an increase in their income or a decrease in their expenses, in 4 out of 5 cases, they will take out another loan in order to meet their basic expenses for the next two weeks. This cycle repeats itself an average of 7-10 times for consumers, and drains Californians of over $578 million in interest and fees, annually.
High-cost car title and installment lending is growing in California. Now that the federal Consumer Financial Protection Bureau is poised to issue rules on payday lending, more payday lenders are moving into these other loan products that are just as dangerous. Our state doesn’t regulate the interest rates on payday loans below $300 or on consumer loans above $2,500. We are seeing more car title loans at interest rates at around 100% APR and longer-term installment loans with interest rates at 200% or higher. For example, one borrower working with us on the campaign paid $6,700 over 24 months for a $2,529 car title loan at 112.47%. It’s outrageous.
CRC and other consumer groups have been advocating for changes to local and state laws to rein in these predatory lending practices for many years, and it has been an uphill battle. One of our greatest challenges is the lack of wide-scale alternatives available on the market. Many of our policy makers accept predatory lending as a necessary evil, because they claim that their constituents need access to these loans, and the banks are not lending.
Do you see where I’m going with this?
This is where the concept of postal banking could really make a tangible difference in providing an accessible, responsible, affordable alternative loan product to consumers. The US Postal Service already provides some financial services, such as money orders, cashing of treasury checks, international paper and electronic money orders and gift cards. There is tremendous potential to expand the products and services offered by the USPS to meet the financial needs of underserved populations. We recognize that moving the postal service into offering consumer loans is a long-term process, not an immediate step. However, given the huge demand for small dollar consumer loans, it is a vision that is worth working toward.
When CRC learned about the Campaign for Postal Banking, we were excited to learn that a national coalition has come together to advocate for the USPS to act immediately to expand and enhance existing products and services. While the creation of small dollar lending and savings programs would necessitate Congressional legislation, the USPS could begin to build on the financial products and services currently offered. For example, the postal service could start cashing payroll checks, it could install surcharge-free ATMs in post office lobbies to enable recipients of public benefits to access their funds without paying fees, and it could introduce bill payment and electronic fund transfer services.
By providing less expensive financial products and services, the USPS could help improve the financial stability of millions of Californians. A postal banking system would not only benefit consumers who do not have access to mainstream financial institutions, it would also provide a sorely needed alternative to the big banks who wrecked our economy with predatory mortgage lending and then exploited tax payers by receiving trillion dollar bailouts.
We know that a public banking option is possible. The United States had a Postal Savings System from 1911-1967, which at its peak held about 10 percent of assets in the entire commercial banking system. Today, 1.5 billion people worldwide receive some financial services through their postal service in countries like the United Kingdom, France, Italy, and Japan. Posts around the world have demonstrated the feasibility of successfully providing financial services, increasing financial inclusion and generating revenue for the postal service.
We believe this is possible in the United States, and it will require our persistent advocacy and campaigning to bring about these types of changes. CRC is optimistic about the current dialogue around postal banking, and we look forward to participating in local, regional and statewide efforts to move this conversation forward. We greatly appreciate the work of A Grand Alliance to Save Our Public Postal Service and the Campaign for Postal Banking.
Thank you for the opportunity to testify.