Washington helped weaken the predatory payday loan industry, but now it is planning a comeback by going after the Consumer Financial Protection Bureau.
Back in October, the U.S. Supreme Court heard oral arguments in Consumer Financial Protection Agency v. Community Financial Services Association. To most, the case might seem exceptionally dry, involving rather arcane arguments regarding Congress’s appropriation powers. However, its implications are vast and depending how the Supreme Court rules, it could usher in a major recession.
The case’s underlying legal issue involves how Congress currently funds the Consumer Financial Protection Bureau (CFPB), the watchdog agency created in the aftermath of the Great Recession to prevent banks from defrauding consumers. The Community Finance Services Association of America (CFSAA), whose position is being argued by former Trump Solicitor General Noel Francisco, claims that Congress’s decision to fund the CFPB “perpetually,” meaning that its funding is set until Congress passes a new law changing the amount, is an unconstitutional usurpation of congressional power. Most legal scholars agree that the argument is highly dubious and would invalidate the funding of most government agencies.
Needless to say, the success of the case has not been dependent on the strength of the legal arguments, but the fact that the CFSAA has thrown an ungodly amount of money at it, hoping to find any legal loophole to cripple the agency.
You might be asking, who even is the Community Financial Services Association of America?
Well, the CFSAA is a payday lending trade association. Payday loans are short-term, unsecured loans that often charge high rollover fees and interest rates. For decades, the payday industry has preyed on low-income people with poor credit who need emergency funds and are unlikely to get help from traditional banks. While these loans might initially appear as a godsend, often the lender is able to get the borrower in a cycle of debt where, due to the high rollover fees and interest rates, borrowers need to keep borrowing from the same lender to pay off previous debts.
In recent years, payday loan companies have experienced some serious setbacks, thanks in part to regulatory agencies like the CFPB. Last year, the CFPB released a report showing that despite laws in several states requiring payday lenders to offer no-cost extension on their payment plans, payday lenders routinely directed consumers to extension plans with high fees and interest rates. This skirting of the law was costing consumers sizable sums. On a typical $300 loan, a borrower could be forced to pay $45 in rollover fees every two weeks. After four months, the borrower would have paid $360, more than 120% of the principal, to the lender and still not paid off the loan.
These types of predatory practices impact many Washingtonians, but to the state’s credit, it has been in the vanguard of pushing back on the payday lending industry.
In the mid-2000s, consumer advocates in Washington organized against the predatory practices of payday lenders by pushing for bans on usurious rollover fees and interest rates. State lawmakers were unpersuaded. At the time, legislators accepted the payday lending lobbyists’ argument that even though the fees and interest rates from payday lenders were high, they were necessary to keep the industry afloat, and without payday lenders, many people — particularly those of low-income — would have no access to credit. In other words, payday lenders convinced lawmakers that the only way to help poor people in the state was to continue to exploit them.
Still, enough legislators recognized that something needed to be done. Eventually a compromise bill passed that, instead of limiting fees and interest rates, limited the number of payday loans a single individual could borrow to no more than eight a year. Lenders could still charge high rollover fees and interest rates, but the law dramatically reduced the chances of a person getting trapped in a cycle of debt by limiting the number of borrowing cycles.
The law gutted the payday lending industry in Washington. According to the Washington State Department of Financial Institutions, since its peak in 2006, the number of payday lending locations has decreased by 92.6%, while since its peak in 2005, the annual dollar volume of payday loans have decreased by 91%. Additionally, the industry was particularly damaged during the pandemic. In 2019, payday lenders in Washington lent out $229 million. Two years later, that number had dropped to $123 million.
While the payday lending industry has dramatically declined in Washington, it is important to acknowledge that it is not gone completely. In 2021, payday lenders still issued 288,748 loans, with the average amount being $427.27. The average monthly income of the borrower was $3,896, meaning that if people making under $47,000 a year — approximately $12,000 less than the state’s median income — had an extra $430 in their pocket, they could have probably avoided payday lending altogether. Nevertheless, they had gotten into a bind and in their desperation, took their chances. If the state experiences a severe economic downturn, then the payday industry will have more chances to capitalize on people’s desperation.
The reality is that the only reason payday lenders survive is because poor people lack access to fair banking services. According to the Federal Deposit Insurance Corporation, over 200,000 Washingtonians are unbanked, meaning that they are not served by any financial institution. And, even if people do have access to banks, it is not certain they can shop around for fair loans. Since the 1980s, banks in the U.S. have increasingly consolidated. In the past 30 years, the number of banks chartered in the U.S. has declined by 67%, and Washington is not an exception to this trend. The lack of competition means that the few banks that do serve an area are free to engage in the same usurious practices as payday lenders.
Luckily, there are ways to prevent this. First, we need to strengthen our regulatory system. Regardless of whatever convoluted legal arguments the payday lending industry has dreamed up, Congress needs to be committed to protecting the CFPB, if not strengthening it. Republicans in Congress have already been successful in exempting dozens of financial institutions from the Bureau’s regulation. While it appears that they have given up on its wholesale destruction, they are committed to weakening it by taking it out of the Federal Reserve System so that it is easier to override its decisions. That cannot be allowed to happen.
Next, we need to bring competition back to the banking sector. The relentless consolidation of banks has only added to the economic troubles of average Americans by limiting their borrowing and saving options. Even the Federal Reserve, which previously championed consolidation, now recognizes that there could be major drawbacks to having only a handful of institutions control the bulk of America’s financial services.
Finally, we need to encourage the creation of public banks. Public banking — where the bank is owned by a public institution and operates on a nonprofit basis — are common in most developed nations. In the U.S., however, the practice is reserved to a handful of unique examples. In any case, public banking adds accountability to the financial industry by providing a public option that can simultaneously serve low-income populations while also creating much needed competition to encourage the private sector to behave fairly toward consumers.
If these reforms are accomplished, Americans, and Washingtonians particularly, will live better lives. They will no longer need to rely on the vampiric payday lending industry whose entire business model is dependent on exploiting the most vulnerable. While previous work has been instrumental in weakening the industry, now is the time for lawmakers to reach for the policy stakes that can be driven through the payday lending industry’s cold, high-rollover-fee heart.
Marco Rosaire Rossi is the executive director of Washingtonians for Public Banking and an adjunct professor of political science at Cascadia Community College.
Read more of the Nov. 29–Dec. 5, 2023 issue.