Predator and Prey: Predatory Lending and the Debt-Buying Industry
November 18, 2016
By Dylan Reim
So the sheer numbers tell us that payday loans and debt-buying must be hugely significant practices, but what exactly are those practices? Payday loans (also called a cash advance or payday advance) are small, short-term, unsecured loans typically taken to keep up with payments between pay periods by low-income or wage workers. Due to their small dollar value and brief repayment time, payday loans tend to carry extremely high annual percentage rates (APR). Because of this high APR, what appears to be a small loan can grow to be unpayable in just a number of weeks.
So if someone must repay a loan which is quickly growing, but doesn’t have access to a couple hundred dollars to do so, where can they go? The unfortunate answer is: another payday loan center. The majority of payday loan borrowers will borrow on multiple occasions, and often from multiple lenders. This vicious cycle essentially locks borrowers in a system of reliance on loans, and they often lack the resources and knowledge needed to reclaim stability.
Now that we’ve discussed some logistics on payday loans, it’s important to look at who’s being affected. Despite what one may guess off the bat, the most common borrower group is white women, aged 25-44. Although that group has the highest rate of borrowing, the negative effects of payday loans are not fixated on any one category of people. Veterans and their families were, at one point, a significant target to loan centers, which began popping up in droves around VA hospitals and military communities. As this was observed, the Consumer Financial Protection Bureau (CFPB) created the Military Lending Act, which capped APR on loans to active-duty and veteran individuals and their dependents at 36% APR. This number, while high, was not the astronomical rate that allows payday loan centers to lock individuals in a cycle of borrowing. After the passing of the Military Lending Act, payday loan centers began to recede; clearly showing their reliance on predatory tactics as an important part of their success.
Military personnel have not been the only beneficiaries of anti-predatory-lending legislation. Payday loans have been made illegal outright in fourteen states and the District of Columbia, while nine others regulate the practice heavily through stricter usury laws.
Despite some actions being taken against them, payday loans are a significant force of debt-generation and perpetuate the vicious cycle which enables debt buying. Debt buying is an industry which has materialized solely for the purpose of buying and selling debts without any input or notice to the debtor. A bank may, for example, decide that pursuing certain debtors will require too much time and resources, so they “sell” the debt to another agency—typically one whose sole purpose is debt buying and collection—with little more than a handshake by way of formal documentation.
Not only is this practice extremely difficult to track from a legislative standpoint, but it’s also often too hectic for a debtor to wrap their head around while being pursued, often leading to their being taken advantage of. In 2014, the FTC received 280,998 complaints regarding questionable or hostile debt collection incidents, from attempts to collect false debts to threats of death or assault if payment was not made.
During my time at the FTC, one particular standout was a debt collector who threatened to exhume the body of a debtor’s deceased child and hang it in her home if she delayed payment of a debt. It was unclear whether this debt was legitimate.
The fact that there is relatively little successful infrastructure managing the debt collection field is troubling, especially when considering that payday loan agencies make small debt-generating loans with incredible frequency and documentation which is often dubious at best.
One reason that predatory lending and collection is particularly slippery from a legislative standpoint is that many of its harmful factors run across agencies. The CFPB might put a cap on military APR, but it has no power to regulate language and extrajudicial tactics used by debt buyers. Although the FTC has a consumer protection bureau, it is a financial institution and doesn’t work with individuals, but rather with markets or agencies at an institutional level; meaning no single group can “solve” the problem.
It is my hope that increased awareness of predatory lending and collection will help individuals facing this type of situation remain aware of their rights and ensure their financial security to the extent of the law. Additionally, a social push against such practices could hopefully spur more congressional action on this important valence issue. Among other notable examples, John Oliver recently discussed this issue at length in his HBO show “Last Week Tonight.” In the segment, Oliver shared the details of his group’s successful creation of a debt-buying company and its relatively inexpensive acquisition of over 15 million dollars’ worth of debt which had aged out of its statute, but was sold with the purpose of allowing an agency to harass less savvy consumers.
Of my many overwhelmingly positive experiences in Washington DC and at the FTC this summer, viewing first-hand many cases and issues regarding a problem that I didn’t even know existed—much less how prevalent it is—was one of the most eye-opening.
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