Millions of people in the United States do not having enough money to cover their basic needs and may be forced to turn to so-called payday lenders – short-term, low-cost lenders who charge interest rates that can exceed 390% – to survive. Borrowers often have to take out another loan to cover the former due to exorbitant interest rates and fees.
It’s the “debt trap» at the heart of the economic model that generates Billions dollars every year for predatory lenders at the expense of some of the the most vulnerable people. This ruinous cycle of debt poses serious human rights risks as it forces people to forgo basic needs such as food or delay paying rent and utilities.
The federal government has adopted relief measures during the pandemic which probably helped keep many people in the United States have to resort to high cost loans. But as these measures expire, predatory lenders are taking advantage of people in precarious economic situations.
In 2017, the Consumer Financial Protection Bureau (CFPB) issued a “repayment capacitywhich required some lenders to determine whether a borrower could actually repay a loan before being allowed to lend. Although this rule does not cover all potentially exploitable loans, it would still help prevent many consumers from falling into the debt trap.
The administration of former President Donald Trump opposed this protection, and the CFPB suspended the rule following fierce repel Of the industry. He ends up revoked rule in 2020. Under the administration of President Joe Biden, the CFPB has still to prioritize restore this essential protection, although Congress has inverted other harmful Trump-era policies on payday lenders.
The CFPB should immediately reinstate and strengthen the ability to repay rule, providing safeguards against extortionate lending practices that are essential to the protection of human rights, especially those of Black, Latinxand low income disproportionately affected communities.
Restoring the CFPB’s repayment capacity rule is not enough to truly eliminate predatory lending. Additional regulations that cap interest rates; improve financial literacy; and providing people living in poverty with access to fair and non-exploitative credit are also necessary. However, people will remain susceptible to predatory practices until they have the necessary income to meet their basic needs. Without structural reforms to persistently tackle great poverty and stagnant wagespredatory lenders can find new ways to exploit the most vulnerable.