This article was co-authored by Mae Humiston, CDFI Manager of Redbud Financial Alternatives and Alex Dadok, VP of Advocacy for Fahe.
Protections against predatory loans may soon suffer a setback, as the Consumer Financial Protection Bureau (CFPB) is considering changing its regulations. When it was announced in February of this year that the CFPB was considering rolling back consumer protections for payday loans, vehicle loans, and other high-cost installment loans, Fahe and its Membership responded to the newly proposed regulations.
These regulations would do away with, among other protections, a set of rules for lenders called the “Mandatory Underwriting Provisions”. The Mandatory Underwriting Provisions, which are scheduled to come into effect November 2020, would cause lenders to determine if the consumer was able to repay the loans according to the terms of that loan, and establish specific underwriting practices to enforce this.
Protections for consumers against predatory payday lending practices could have a particularly large impact in Central Appalachia where we work. Though Appalachia is a beautiful region, full of hard-working people and potential, decades of economic disinvestment and extraction have resulted in median incomes lower than almost any other area in the country.
These economic challenges have contributed to an emptying out of banking institutions from the region, leading to large portions of Appalachia becoming under- or un-banked. When one adds the difficult transportation realities of Appalachia and widespread gaps in broadband access, the challenges of personal finance in Appalachia grow. And without mainstream financial services offered by retail banks, people often turn to payday lenders. As many of us know, with annual interest rates of 300% or more, payday loan debt service can overwhelm consumers and create financial hardship. Borrowers can become trapped in a vicious cycle of rollovers and fees that double the borrowed amount in only a few months’ time.
There is some good news: Fahe Members, like the Housing Development Alliance (HDA) in Hazard, Kentucky, have seen the need for fair lending in their communities and pursued ways to make it available. HDA has created Redbud Financial Alternatives, Inc., a Community Development Financial Institution that makes fair loans to people trapped in payday loans, among other efforts to make affordable credit accessible to everyone in Eastern Kentucky.
Until we can reverse the trend of financial institutions leaving our region and raise incomes across Appalachia, payday lenders will likely continue to operate here. While the creation of nonprofits like Redbud are important early steps in the process of bringing affordable credit back to Appalachia, consumer protections are still needed now. Protecting people from predatory loan practices helps the financial stability of the families who have little choice but to rely on small-dollar lenders in times of emergency.