Durbin Submits Testimony To House Financial Services Subcommittee Hearing On Payday Lending

WASHINGTON – U.S. Senate Democratic Whip Dick Durbin (D-IL), a longtime champion of legislation to rein in the predatory payday lending industry, today submitted testimony to the House Financial Services Subcommittee on Consumer Protection and Financial Institutions hearing on ending debt traps in the payday and small dollar credit industry. The subcommittee will discuss the Protecting Consumers from Unreasonable Credit Rates Act of 2019, a bill Durbin reintroduced yesterday that would eliminate the excessive rates and steep fees charged to consumers for payday loans by capping interest rates on consumer loans at an Annual Percentage Rate (APR) of 36 percent—the same limit currently in place for loans marketed to military service-members and their families. 

Full text of Durbin’s prepared testimony is available below: 

Chairwoman Waters, Subcommittee Chairman Meeks, members of the subcommittee: Thank you for allowing me to submit testimony on this important consumer protection issue.  We know that nearly 12 million cash-strapped Americans are charged interest rates exceeding 300 percent for payday loans, and that the payday lending industry collects about $8 billion in fees each year as a result. 

But there are two numbers that really tell the story about the payday lending industry for me: “75 percent” and “10”—75% of all fees collected by the payday loan industry are generated from borrowers who have been forced to renew their loans more than 10 times in a given year because they lacked the ability to repay the full loan.  These figures make one thing clear: the payday lending business model is designed to trap consumers in never-ending cycles of debt that can result in serious and irreparable financial harm. 

These payday lenders prey on desperate individuals who find themselves in need of quick cash, often for things like necessary car repairs or medical care.  They know that these individuals have trouble accessing lower-interest-rate forms of credit that are offered by traditional banks, and they charge higher interest-rates as a result. 

Since the payday loan business model doesn’t require the lender to take any consideration of whether the borrower has the ability to repay their loan, payday lenders provide these loans knowing full well that the borrower lacks the ability to repay them in full with their next paycheck.  This effectively forces them to choose between default and repeated borrowing.  As a result, nearly four out of every five payday loans are renewed within 14 days, and the majority of these loans are renewed so many times that borrowers end up paying more in fees than the amount they originally borrowed. 

In my home state of Illinois, payday lenders charge consumers an average interest rate of 323 percent, an egregious amount given that the average payday loan is typically for $365. These loans pose serious financial consequences for borrowers, including delayed medical care, and even bankruptcy.  These predatory lenders should not be allowed to pad their pockets with the hard-earned money of families that are barely getting by.   

I am pleased that the Committee is seeking ways to rein in predatory loan practices in the payday lending industry.  My legislation, the Protecting Consumers from Unreasonable Credit Rates Act, would combat these abusive payday lending practices by capping interest rates for consumer loans at an Annual Percentage Rate (APR) of 36 percent—the same limit currently in place for loans marketed to military service-members and their families.  I’ve been honored that Representatives Cohen and Cartwright have joined me in this fight by introducing the House companion legislation in past years.  I’d also like to thank my Senate colleagues—Senators Merkley, Blumenthal, and Whitehouse—for leading this fight with me in the Senate.  This legislation is supported by Americans for Financial Reform, the NAACP, Leadership Conference on Civil and Human Rights, Center for Responsible Lending, and Woodstock Institute.

Simply put—if a lender can’t make money on 36 percent APR, then maybe the loan shouldn’t be made.  Fifteen states and the District of Columbia have already enacted laws that protect borrowers from high-cost loans, while 34 states and the District of Columbia have limited annual interest rates at 36 percent or less for one or more types of consumer credit.  But there’s a problem with this state-by-state approach—most of these state laws are riddled with loopholes and out of state lenders are able to evade state usury laws.  My bill would require all consumer lending to conform to the 36 percent APR limit, effectively eliminating the many loopholes that have allowed predatory practices to flourish in states around the country.

During the Obama Administration, the Consumer Financial Protection Bureau (CFPB) finalized new rules requiring payday lenders to use traditional underwriting standards that assess whether a consumer has the ability repay a loan before the loan is made.  This important action by the CFPB marked the first time ever that the federal government had stepped in to rein in predatory payday loan practices.  Unfortunately, the Trump Administration is working to help the payday loan industry by attempting to eliminate this crucial consumer protection rule.   This is another reason why Congress should act now by passing my bill or similar legislation.

We all understand that families sometimes fall on hard times and need a loan to make ends meet—most Americans have been there at one time or another.  That is why I included in my bill the flexibility for responsible lenders to replace payday loans with reasonably priced, small-dollar loan alternatives.  The bill allows lenders to exceed the 36 percent cap for one-time application fees that cover the costs of setting up a new customer account and for processing costs such as late charges and insufficient funds fees.

At a time when 40 percent of U.S. adults report struggling to meet basic needs like food, housing, and healthcare, establishing a 36 percent APR on consumer loans would help the nearly 12 million Americans who take out payday loans each year dedicate more of their resources to providing for their families and buying American goods and services instead of padding the pockets of payday lenders. 

I want to thank you, Chairwoman Waters and Chairman Meeks, again, for holding this hearing.  Unfortunately, under Republican control in recent years, Congress has largely failed in its oversight responsibilities of the payday lending industry—failing to hold hearings to examine the role payday lenders are playing in exacerbating the financial conditions of our most vulnerable citizens.  It gives me hope that in the opening months of your leadership of this committee, there is renewed attention to Congress’ responsibility to oversee the payday loan industry and protect Americans from the abuses posed by bad actors in the financial marketplace.