The DebtHammer Newsletter: Issue #1

War… What is it good for? Not payday lenders.

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America is in the middle of a war. No, not the war on terror. Or the war on drugs. Or the war on poverty… Okay, so America is in the middle of a lot of wars.

But we’re not talking about them right now. No, right now we’re talking about the war on usury (read: you-zir-ee). More specifically, the payday loan industry.

A Quick Recap

Short-term, high-interest loans have been around for years. Decades, even. In 1916, the Uniform Small Loan Law allowed a 3.5% monthly rate (or a 42% APR) on loans with balances up to $300.

This marked the beginnings of the spread of installment loan providers. By the mid-20th century, the market for these credit products was in full swing, with lenders across the United States peddling potentially predatory forms of financing.

And by the 1980s, federal and state laws had grown lax enough that the payday loan industry (with its shady lending practices and triple-digit interest rates) began growing into what it’s become today.

The Modern Landscape

In the 2000s, the tide began to turn in the opposite direction. The federal government created the Consumer Financial Protection Bureau, and states that had previously allowed payday loans started changing their tune.

Even some of the “red states,” known for their more conservative and pro-business attitudes, started to place upper limits on the interest rates that lenders could charge.

Notably, in 2001, North Carolina banned payday lending outright. They imposed a 36% APR limit on short-term, small-balance loans, and have held that line ever since. That precedent has served to inspire many other states, who have largely copied the 36% limit when implementing their regulations.

Nebraska Takes a Stance

In the most recent election, Nebraska joined the ranks of states cracking down on predatory lending practices.

Their Proposition 428 passed with flying colors in November. An overwhelming 83% of voters supported the bill, which included the following regulations:

  • Payday loan amounts are not to exceed $500
  • Repayment terms are not to exceed 34 days
  • Loan rates are not to exceed 36% APR

This makes Nebraska the latest in the growing list of states to drastically reduce or altogether eliminate payday loans within their borders.

As of the date of this newsletter, seventeen states and the District of Colombia have outlawed usurious payday lending rates and practices. Colorado, Montana, New Hampshire, South Dakota, and now Nebraska all limit the total APR for payday loans to 36%.

This came as a surprise to some since payday loans have typically run rampant in states that lean red, and Nebraska has voted Republican in all but one of the last ten elections.

Industry experts project that this will cause most payday lenders to pull out of the Cornhusker State, which they’ve done in all the other states that capped payday loan rates.

Perhaps this is a sign of change to come, because when President-Elect Joe Biden enters the oval office, he’ll also officially take command of the CFPB.

Speaking of the CFPB…

During President Trump’s time in office, he and his administration demonstrated that they were against placing restrictions on lenders, even payday lenders.

They had the CFPB roll back a rule originally instituted in the Obama years that required all lenders to assess a borrower’s financial capacity before accepting their application for a loan.

Most lenders already follow that rule, which is why they check your credit score, look at your employment record, and gauge your debt-to-income ratio before approving you for any new debt.

They want to be reasonably sure you can pay them back. Of course, mostly because they’d like a return on their money, but also because they’re (hopefully) not trying to bankrupt you.

Interestingly, the CFPB is currently continuing to look into ironing out the details of this rule reversal. They’re conducting interviews and gathering information to put out new guidance on their current policy, even though it will probably end up being a waste of their time.

President-Elect Joe Biden has made it clear with his hiring choices that he’ll have no problem reining in payday lending, and he’ll almost certainly reverse the recent policies to the contrary.

His administration may even try to implement a country-wide 36% limit on interest rates.

What’s all the fuss about, anyway?

If you’d like to make up your own mind on whether lenders should be restrained, here are the general arguments on both sides:

Payday loan advocates claim that their loans do more good than harm.

They argue that borrowers need their loans to help make ends meet and that excessive regulations prevent them from providing a valuable service to a clientele that relies on them.

Their borrowers can’t access traditional credit sources, and the loss of payday loans would strip them of any financing.

Parties against payday loans vehemently disagree. They point to the excessive interest rates, commonly hidden fees, and increased rate of default as more than reason enough to ban payday lending everywhere, forever.

Who’s right? That’s for America to decide, perhaps even state-by-state. In any case, it seems like more change is on the horizon.

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