Predatory lenders find borrowers desperate for a lifeline as the pandemic stretches on

As millions of Americans are pushed into a state of financial precarity—due to job loss, decreased income and medical bills—some may find themselves the target of predatory lenders taking advantage of the financial crisis created by the coronavirus pandemic.

Rent moratoriums are expiring. Record levels of people are receiving unemployment benefits. Many people are struggling with the loss of a $600 weekly federal bonus which recently expired. Stimulus checks haven't stretched far enough as the pandemic draws on. The long term financial trajectory for many Americans is up in the air and some are turning to loans.

But these precarious conditions are being compounded by borrower protections on predatory loans being rescinded, as the director of the Consumer Financial Protection Bureau finalized last month. 

Now, whether someone has the financial ability to pay back a loan they applied for is not a mandatory requirement that lenders must verify. Experts say that this deregulation could have dire consequences down the line, as people desperate for cash, including those who have been left out of government assistance, may turn to payday and auto title loans, which often use misleading or deceptive practices. 

“The CFPB action to rescind these safeguards will end up doing financial damage to millions of Americans who are struggling paycheck to paycheck, and it's likely that this recession will end up costing millions of borrowers billions of dollars,” said Alex Horowitz, a researcher for Pew’s consumer finance project.

The rescinded rule was finalized in 2017, and never fully implemented by the Trump administration. But financial experts say that the long term impacts of this reversal will be more acutely felt in months to come, as rent moratoriums expire, and unemployment benefits are reduced. 

“Payday lenders have access to a borrower's checking account on payday as their collateral for the loan,” Horowitz said. “And that means that even if a borrower can't afford the payment, the lender has strong leverage over them, and has the authority to withdraw payment from their account on the day they're receiving income, even if that leaves them short to pay their regular bills.”

Rates of people taking out loans—including payday and auto title loans—appear to have decreased within the past few months, which experts say may be due to increased unemployment funds, which helps particularly low-income peoples’ cash flow, and an abundance of caution. But they worry that when borrowing levels return to normal, people may get caught in debt traps. 

According to a Wall Street Journal investigation, payday lenders, some of which are based in California, are already using online marketing to target consumers who have been financially impacted by coronavirus. 

Horowitz said that 12 million Americans use payday loans and 2.5 million use auto title loans annually.

He explained that payday loans are deceptive in that they’re advertised as only lasting for two weeks, but the average borrower ends up in debt for five months. The price a consumer sees advertised is not the price they end up paying over the loan’s life.

The loans appear to be a bridge across a temporary shortfall, but seldom function that way, because people can’t afford to give up so much of their next paycheck, “especially not when they're living so close to the edge.”

Whether someone can pay back their loan is not a concern of high-interest lenders, said José Quiñonez, founder and CEO of Mission Asset Fund (MAF), a San Francisco-based nonprofit that offers low-income and immigrant people zero-interest loans and helps them build credit. “They make their money out of fees and recurring fees, and they make a significant amount of money when people get stuck in debt traps,” he said. 

Quiñonez said that he is concerned that people who have been left out of governmental aid, including immigrants, might be more likely to view a payday loan as a feasible option, absent any others.

“I think in the long term, I do worry that more people, more families, are going to get trapped into bad products, particularly in this moment,” he said. “Because when families or individuals are not able to earn any money, lost jobs or reduced incomes, they’re going to  see a payday loan as a viable, quick alternative.”

Quiñonez said that while in April and May there was a “steep decline” in people requesting loans from MAF, which he said was out of applicants’ abundance of caution, more people are starting to apply for loans as the pandemic continues. 

“I have lost my job since March 15 and have not been able to pay my rent since March,” a loan applicant at MAF wrote. “I have been taking loans out to pay my bills and college tuition for the rest of the year. I also was not eligible for the stimulus check even though I file my own taxes. I was relying on that to give me some of the relief of being able to pay my bills and rent, but I did not receive anything. I am in debt due to the COVID and will not be able to get out of this debt for a while.”

Just last week, another protection from the federal Office of the Comptroller of the Currency’s (OCC) was lifted, that exempts buyers of high-interest loans from state-determined interest rate caps.

California Attorney General Xavier Becerra, who filed a lawsuit challenging this rule alongside the Illinois and New York attorney generals, said that this rule opens the door for further predatory lending in what some call “rent-a-bank” schemes, in which predatory lenders couple with banks to avoid state interest-rate caps. 

“As the Trump Administration opens the door to predatory lending, we'll work to close it by taking them to court," Attorney General Becerra said in a release. "Our state recently strengthened its protections against high-cost predatory lending. Now, the OCC creates loopholes that allow predatory lenders to bypass our laws. Particularly during this period of economic crisis, the Trump Administration should fight to stop these bad actors, not enable them.”

Suzanne Martindale, senior policy counsel for Consumer Reports’ advocacy branch, said that she is concerned about how payday lenders are already marketing towards people who are struggling financially due to the pandemic. 

“If there aren't significant policy interventions that will shore up safety nets that will give people debt relief of some kind, people are going to need to pay their bills, and they're going to fall behind,” she said. “And unfortunately, there will be wolves at the door, who are going to be more than happy to make a profit off of people's financial desperation, because we've seen it time and time again.”