From mortgage lending to credit-card loans and payday lending, the recession shed harsh light on serious lapses in the consumer-financing system, exposing practices that have led millions of consumers to ruin. The Consumer Financial Protection Bureau, created to fix and oversee the system to protect consumers, has lost time to Republicans balking at its structure. It is reassuring that in his first weeks as director, Richard Cordray swiftly is giving the agency running legs, signaling supervision of payday lending as a top priority.
Last week, Cordray released guidelines the consumer agency will use across the country to conduct a close review of the payday lending industry. As he noted, there has been little federal oversight of lending practices in the nonbank sector, those companies that offer financial services (such as check-cashing and payday loans) but are not chartered as banks or credit unions.
Cordray was careful, as he launched the first field hearing on payday loans last week, to stress that the goal of the review is to figure out the best way to ensure that consumers have “access to a small loan market that is fair, transparent and competitive.” Fairness in the payday market is crucial. The $34 billion-a-year industry points to a robust market for small, short-term loans, particularly in low-income households, where a loan as small as $100 can bridge the gap between paychecks.
But the industry has acquired a predatory reputation for good reason. The loans typically come at steep cost, the annualized rate on a $100 loan often approaching 400 percent. Borrowers unable to pay off a loan often roll over the debt or take multiple loans, accumulating additional fees with each transaction, digging themselves deeper into a financial hole. Unfair practices are common, among them misleading marketing and aggressive debt-collection tactics. The monitoring the consumer-protection agency promises comes none too soon.