Do you remember the mortgage crisis, a time when the housing market was riddled with interest-only, subprime, and negative amortization loans? The foreclosure rates between 2006 and 2007 were at an all-time high. Americans could not afford the payments on their risky loan obligations. The domino effect led to the credit crisis, the gateway to the Great Recession, which lasted from 2007 to 2009. It began after the stock market crash in the early 2000s when the Federal Reserve tried to stimulate the economy by lowering interest rates. Big investors were not happy with the low unattractive interest rates, so Wall Street offered an alternative solution, which led to a path of devastation for unsuspecting consumers.
Everyone closed their eyes to the onerous Wall Street solution—consumers were sold homes they couldn’t afford. Meanwhile, the mortgage companies leveraged their risk by offering subprime loans and carried default insurance. After all, some borrowers were actually unemployed.
The factor that created the mortgage crisis is parallel to the payday loan debacle today. When borrowers seek short-term financing to make ends meet until their next payday, the payday establishment doesn’t consider whether the borrower can afford the loan, they leverage risk by offering subprime loans that borrowers can never sustain and hold access to borrowers’ bank accounts or automobiles for collateral.
There were no regulations prior to the credit crisis, Wall Street was left to their own devices, allowed to regulate themselves. Our current administration doesn’t favor payday loan regulations and can’t wait to roll-back Wall Street regulations. You may have heard the president’s vow to do a “big number” on financial regulations and doesn’t believe that Dodd-Frank is working.
The Dodd-Frank Wall Street Reform and Consumer Protection Act was created in 2010, the law created the Consumer Financial Protection Bureau (CFPB), a consumer watch dog. Among other things it requires lenders to verify that borrowers can repay their loan obligations, which requires verification of employment, credit score rating, and debt-to-income ratios.
The CFPB extended its reach to Payday loans by proposing new regulations requiring payday lenders to determine if some borrowers can afford the loan and place restrictions on loan rollovers that become long-term debt equating to interest rates of over 300%.
Although the CFPB is currently independent and can’t be controlled by Congress, that may change, if the administration is successful in removing the CFPB director and replacing him with a panel controlled by Congress. The agency has been successful in their actions to create regulations to protect consumers from financial abuse. In September 2016, the agency busted Wells Fargo, one of few big banks unaffected by the mortgage crisis, for opening 2 million phony bank accounts, assessing unwitting consumers millions of dollars in fees. The watch dog agency stopped PayPal from signing up consumers for credit lines they didn’t ask for. Corinthian College had to pump their breaks after investigations found that they were charging high interest rates on private loans to low-income students who were destine to default. Let’s not forget Bank of America and FIA card services, their credit ring was put on hold after charging 1.9 million consumers for services they never asked for. You would think that your representatives would want to protect you from these predatory instruments, right?
Lenders justify payday loan practices under the ruse that it gives consumers more options. They say that they fill a critical hole in the economy, allowing people who have poor credit, no savings, living paycheck to paycheck the ability to borrow money to help them in a crisis.
This is true despite the fact that they saddle the borrower with seemingly never ending debt and sometimes leave borrowers carless. You can’t depend on government to protect you, equip yourself to survive in our capitalistic system by following the practices in my book, Financial Freedom, A Guide For Personal Finances, to help improve your credit score, get out of debt, save for emergencies avoiding a payday loan, and spotting scams.