Predatory Lending: Faith Communities Mobilizing to Defend the Vulnerable
Naya Burks, a single parent in St. Louis, took out a $1,000 loan to cope with expenses that couldn’t reliably be paid with the irregular hours at her job. When she was unable to keep up with payments on her high-cost loan, which carried an annual interest rate of 240 percent, the lender sued her and began garnishing her wages, even as interest continued to accrue. Ultimately, that $1,000 loan turned into a $40,000 debt, and it was only during the course of an investigation that the debt was forgiven.
Burks’s story is one among millions of Americans who take out a high-cost predatory loan each year, such as a payday loan pledged against the next paycheck. In Texas alone, there are approximately 3,500 payday lenders, more than there are grocery stores. In Louisiana, payday lenders outnumber McDonalds. In these states and across the country, advocates are increasingly joined by faith leaders, who recognize that predatory loans aren’t just about dollars and cents, but about underlying moral questions.
The religious community’s emerging activism should not be surprising: predatory lending is an affront to the tenets of economic justice taught in most faith traditions. Judaism, Christianity, and Islam, for example, all call for just lending practices in their sacred texts and teachings. Guided by their faith, many religious communities have been working to confront this injustice. These efforts include not only providing financial assistance to people like Burks, but also mobilizing to take direct action to improve the system that makes borrowers like her vulnerable to such egregious exploitation.
When payday loans fail – a frequent occurrence, as four out of five borrowers are unable to pay back the debt without reborrowing or refinancing – struggling families are left turning to churches, social networks, and the safety net to get out of a debt trap. As a result, we all pay the price for high-cost loans that probably should never have been made in the first place.
Faith leaders recognize these effects of predatory lending. As Stephen Reeves of the Cooperative Baptist Fellowship noted at a Consumer Financial Protection Bureau hearing this spring, “Our churches and pastors have seen firsthand the consequences of payday and auto title lending in their congregations and communities. They have used their benevolence funds to aid neighbors trapped in cycles of debt proven to be so central to this business model.”
Seeing this suffering has pushed many faith leaders to advocacy. Only three of the 20 most religious states have a maximum interest rate that bans high-cost payday loans. Bishops of the Texas Catholic Conference have made this issue a key priority, and other interfaith efforts are underway in states like Virginia, Minnesota, Alabama, Kentucky, and Louisiana.
There is no question that high-cost, predatory lending is just one consequence of broader economic distress. If the federal minimum wage had kept pace with inflation since 1968, it would now be more than $10, rather than the current $7.25. And many Americans, at all incomes, don’t have much of a financial cushion; a recent Federal Reserve study found that nearly half of all households reported they would be unable to come up with even $400 in an emergency without borrowing or selling something. Yet when they do turn to borrowing, those in the financial mainstream can often put purchases on a credit card at 16 percent or less, while the annual interest rates on payday loans are in the triple digits, typically approaching 400 percent or more.
State legislatures, Congress, and the CFPB, all have a role to play in taking action to stop these debt traps plaguing low-income families and communities.
It’s time for states to act in the interest of their low-income residents. Currently only 14 states and the District of Columbia have an interest rate cap that restricts predatory lending. Every time this issue has been on the ballot – including in states as diverse as Ohio, Arizona, and Montana – responsible credit practices have won out with voters.
Yet in some cases, lobbying and loopholes have made it difficult for these efforts to be effective, making federal action essential as well. Nearly a decade ago, Congress established a 36 percent interest rate cap on many loans to members of the military, and it’s a good idea for everyone, as Sen. Dick Durbin (D-IL), Rep. Steve Cohen (D-TN), and Rep. Matt Cartwright (D-PA) have proposed.
Meanwhile, the CFPB is drafting the first-ever federal regulations for payday loans this year. While it cannot cap rates, it can take steps to ensure that loans are only made when it’s clear that borrowers have the ability to pay them back, and limit lenders’ ability to automatically seize funds from accounts. This rule must be as strong as possible to prevent predatory lending from continuing to devastate families and neighborhoods.
If these efforts succeed, it will be both from the documented economic harm of these loans and the reminder from our faith traditions that exploiting the vulnerable is simply wrong.
Joe Valenti is the director of consumer finance and Claire Markham is the outreach manager for the Faith and Progressive Policy Initiative at the Center for American Progress. Follow Joe on Twitter at @moneyjoev and Claire at @clairecmarkham.
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