Social change work is hard and frustrating and wonderful and terrible; it is also, at times, funny, quirky and just plain fascinating. With this blog we hope to capture all that goes into what we do at Capital Good Fund, and we invite you to join the conversation!

Wednesday, October 22, 2014

The NY Times Editorial Board Gets It Right on Usury

Someone Needs to Stop the Bad Guys

As we've frequently discussed, we are very focused on putting the $100 billion / year predatory financial services industry out of business. Not only do predators like Advance America trap low-income, vulnerable families in a vicious cycle of debt, but at the macro level they are a serious drain on the economy; after all, every dollar spent on interest is a dollar not spent in the local, regional, or national economy. In short, predatory lending keeps the poor in poverty, it harms the economy, and it perpetuates the divide between the "haves" and the "have-nots."

The Problems We Face

When it comes to putting the bad guys out of business, we face several challenges. First, these predators are well-resourced and possess a powerful lobby. Rhode Island is a case-in-point: despite bi-partisan support over the past 4 years—as well as a coalition of several dozen non-profit, religious, and community groups—we have been unable to cap the interest rate that payday lenders can charge at 36% (the current rate is 261%). Second, legislation has its limits, and can often look like a game of "Whack-a-mole"; every time we rein in one predatory practice, another one pops up. Third, a patchwork of state regulations make it hard to ensure that consumers receive consistent, across-the-board protections from the worst offenders.

And finally, these predators have a massive brick-and-mortar presence in low-income communities (consider, for instance, that in many states there are more payday loan shops than there are McDonald's! This one makes it hard for us to compete for customers against these predators; the convenience and immediacy of getting a payday loan is something we will simply never be able to replicate. Why? For the simple reason that—because we care about a client's ability to pay—we actually review their application. In contrast, payday lenders require little more than a pulse, a bank account, and a paycheck—and I like to joke that they are flexible on the pulse!

NY Times Endorses a Potential Solution

This is why we are delighted that the NY Times EditorialBoard has endorsed a plan "that would adopt the 36 percent [interest rate cap] standard for all consumer transactions, including those involving payday loans, mortgages, car loans, credit cards, overdraft loans, and so on." If written correctly (and that is a big "if"), the proposed legislation would make it very simple for lenders to understand and comply with regulation while creating a universal consumer protection. One big barrier to our scale, in fact, is that each state has its own usury limits, and they are often confusing and contradictory. I don't even want to think about the issues this would raise between state's rights and the power of the federal government, but at the end of the day only federal action can truly create a level playing field for all (and it will save us a lot in legal fees!).

You can view the original NY Times piece here:

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