Trump appointees go easy on fin-tech payday loans that trap consumers

Payday-style loan apps are getting an easy ride from Trump's agencies

The Trump administration rewards its friends, especially those who make their living loaning money to cash-pressed consumers, lifting rules and looking the other way as the affordability crisis lands hardest on working people.

Now the Consumer Financial Protection Bureau — once the most active agency working to protect consumers — is loosening the reins on the fin-tech industry, agreeing to let app-based payday lenders continue to hide the true cost of their predatory loans from consumers.

Consumer advocates are crying foul.

“App-based payday lenders drain workers’ wallets with high, often obscured fees and typically charge an Annual Percentage Rate (APR) well above 100%. Instead of addressing this problem or requiring an even playing field for both bank and non-bank lenders, political leadership at the CFPB just moved to exempt fin-tech lenders from the law requiring equal disclosure of the cost of loans as an APR,” said Mike Calhoun, president at the Center for Responsible Lending (CRL).

“This is the latest in a string of moves from this Administration that gives financial technology firms a free pass from basic legal obligations that protect and inform consumers. This move also undercuts a level playing field with bank lenders, and other responsible lenders that comply with the laws of the states where they operate, and undermines the ability of states, as the primary fin-tech regulators, to protect their residents from high-cost loans using their well-established authority to enact usury laws.”

What’s this all about?

Payday loans are short-term loans that typically come due on the borrower’s next payday. They carry remarkably high interest rates, often in excess of 100% APR, sometimes even approaching 400%. Even worse, they trap consumers in cycles of unending debt. If a borrower can’t pay the loan when it comes due, they can refinance for another few weeks. This is called a “rollover” and piles even more exorbitant interest charges on an ever-expanding base.

Payday loans are illegal in about half of the states. In some states, they’re available in storefronts and online. Even in states where payday loans are illegal, there is virtually no enforcement against lenders who break the law by advertising on search engines and social media, which themselves rake in piles of cash by luring their readers (or “users,” as social media calls them) into penury.

A new twist in the plot is something called “earned wage advance (EWA) products.” It’s a phrase coined by the so-called fin-tech industry, meaning high-tech firms that use modern technology to wring more money out of consumers through the use of apps, a super-convenient way to amass piles of debt.

The rationale behind the EWA is that it’s not really a loan, it’s just a way of giving you access to money you have earned but don’t have yet. It usually requires that you authorize your employer to pay your wages to your EWA lender.

The CFPB is working to protect the fin-tech industry at the expense of consumers. CFPB acting director Russell Vought has just issued an advisory opinion that claims the Truth In Lending Act (TILA) does not apply to certain “earned wage access (EWA) products” – using the industry’s term for payday loan apps – because their loans are not a form of credit and their fees are not finance charges.

The advisory opinion also announced plans for a Compliance Assistance Sandbox program, a way for companies to get legal protection while they experiment on consumers with new products, and it rescinded a proposed interpretive rule issued under former Biden-era CFPB Director Rohit Chopra that affirmed app-based payday loans are a form of credit and their fees are finance charges.

Trapped in debt

Several Center for Responsible Lending research reports show how these loans trap people in debt.

For instance, by reviewing an anonymized dataset of thousands of app borrowers, CRL found payday loan apps are designed so that people – over the course of a year – doubled their borrowing frequency, rising from two to four loans per month on average.

It also found borrowers paid annual interest rates for app-based payday loans that were comparable to the nearly 400% APR typically paid for storefront payday loans. To see all CRL research and policy reports on this predatory product, visit responsiblelending.org/paydayapps

Stay out of trouble

There’s no easy answer to the no-cash problem that many hard-working people face but Rule No. 1 should be to avoid payday loans and EWAs like the plague. They will only make things worse.

There are some options, although they’re admittedly not pleasant:

• Join a credit union. They’re non-profit and usually locally owned. They charge infinitely less interest than a payday loan.

• Try to negotiate. Talk to your creditors, assure them you want to pay and ask to set up a payment plan. Don’t rule this out. Most businesses will work with you.

• Borrow from family and friends. Of course you don’t want to do this, but it may be the best option.

• Get a second (or third) job. Drive an Uber, get a gig with DoorDash, do some pet-sitting, ask a local store where you’re a regular for a part-time job.

• Find a community agency, church or volunteer group that can loan or give you enough to keep the wolf away. These exist nearly everywhere. Ask around!

• Sell or pawn something. You can replace just about anything but money paid in over-the-top interest is gone forever.

• Remember, you’re not alone. Everyone has money problems now and then. Learning to handle them is worth the trouble.