A little under four years ago, when Stephany Morales's daughter was 6 months old, the girl developed a bronchial infection. Morales, who was studying for her nurses' certification in Nevada at the time, took her daughter to the hospital, where doctors said that she needed a nebulizer unit.
Morales, then 19, didn't have a credit card or any other ready source of cash. Her health insurance didn't cover a nebulizer rental. Desperate to protect her baby's health, Morales ducked into a payday lending business and borrowed $400.
At the moment, the loan seemed the easiest way to get much-needed cash. In reality, it was the beginning of a nightmare. Already living on the edge financially, Morales found it impossible to repay the small loan. Every two weeks, she accrued another $55 in fees as she rolled the payday loan over again, on top of interest on the loan and origination fees for opening another loan to pay off the first.
Over the course of that first year, she paid, in fees, many times the original value of the loan. She began borrowing from one payday lender to pay off another. Each loan resulted in more debt, more fees.
"You don't see how deep you're getting in, because of the cycle of debt," Morales explains more than three years later. Swimming in debt, she lost her 1984 Toyota Camry, then had to quit nursing school. She moved to Washington state, where she has been treading water in a low-wage job, hoping against hope to find the means to complete her nursing studies. That original $400 loan, she estimates, has cost her more than $10,000 already. She says that she still owes more than $11,000 to payday lenders and a car title loan company. Her credit is ruined.
"There's no way I can ever pay it back," Morales believes.
Over the past couple decades, as one state after another eviscerated its laws regulating how much interest can be charged on a loan, in the name of deregulation, payday lending has exploded around the country.
Millions of low-income Americans, locked out of more favorable credit systems, rely on these loans, which critics call monstrously exploitative, to tide them over from one payday to the next.
The loans, critics add, are clearly structured so as to be unpayable, designed to fleece vulnerable clients for every cent they have. Borrowers risk losing their cars, their tax rebates, their bank accounts and even their homes simply because they need a few hundred dollars quickly, usually for a small, everyday, expense, and don't have collateral for a traditional loan.
In Albuquerque, New Mexico -- a state with 66,000 outstanding payday loans to 12,000 consumers, many of them on Native American reservations, and more than 700 payday lending companies in operation as of the end of 2015 -- grassroots advocates expressed concerns, among many, about a retiree who ended up $9,100 behind on his mortgage payments and was hovering on the edge of foreclosure after racking up huge payday loan debt.
"Their business model is to strip away wealth and security, to take advantage of people who don't have enough to make ends meet," says George Goehl, co-director of the Chicago-based People's Action Institute and People's Action's Action, a national organization which has been coordinating with other progressive groups nationwide to try to rein in the industry.
Rev. Wes Helm of the social justice organization Faith in Texas says his researchers have been interviewing Dallas-area congregants about payday loans since 2015. The loans, he observes, "put people into a financial death spiral."
Texas has some of the worst payday lending conditions in the country, advocates say, with some loans tapping out at more than 1,000 percent interest annually. That's about 300 times the interest rate banks charge a person with good credit for a 15-year-mortgage.
Helm recalls a musician who placed his tuba in a pawnshop, then took out a loan from a payday lender so he wouldn't lose his instrument.
It didn't work. Once he got caught in the payday lending trap, he quickly lost not only his tuba but his apartment as well. His marriage was destroyed by the stress of debt, and eventually he ended up couch surfing from one friend's home to the next.
In recent years, payday lenders have stripped poor communities of more than $10 billion, according to estimates generated by People's Action. Absent a federal mandate to limit interest rates, some states have become havens for what many view as predatory short-term lending. The Center for Responsible Lending has calculated that the average payday loan issued in Texas has an annual percentage rate (APR) of 662 percent; in Ohio, it is 677 percent; in Delaware, 521 percent; in Utah, it is 6548 percent; in Nevada, 652 percent; in Virginia, 601 percent; in Wisconsin, 574 percent; in California, 460 percent.
While these states, advocates say, are among the worst environment for payday loan clients, in the great majority of states -- those lacking explicit interest rate caps -- borrowers will rack up many hundreds of percent a year interest on these loans.
During the Obama presidency, however, consumer advocates began to make progress against payday lending practices that trapped borrowers. A dozen states -- including North Carolina, New Jersey, South Dakota and Arizona -- enacted laws curtailing the interest day lenders could charge.
In many instances, these restrictions were explicitly intended to drive payday lenders out of the state, using as a template congressional legislation, passed in 2006 -- the Military Lending Act -- that restricted interest charged to those in the armed services, and their families, to 36 percent.
The impetus for this legislation was a widespread recognition of the dangerous situation that occurred when large numbers of military personnel were driven into conditions of debt from which they could not escape. Where state legislators were unwilling to take action, localities -- including 43 cities in Texas -- placed their own ordinances regulating the activity of payday lenders.
While Congress hasn't expanded the Military Lending Act to cover the broader population, over the past decade there were a few small moves toward reining in the payday lending industry at the federal level. In the wake of the financial crisis, the Obama administration established the US Consumer Financial Protection Bureau (CFPB). While legally prohibited from setting a federal cap on interest rates, the CFPB does have the power to mandate that lenders verify the income sources of borrowers, and also to limit the number of loans people can take out simultaneously.
In 2017, still controlled by Obama-era appointees, the CFPB established what is called an "ability to repay principle," mandating that payday lenders look at would-be borrowers' income and expenses before determining whether to grant loans in most instances.
In part because of its attempts to control payday lending, which grassroots advocates say has a powerful lobby, the CFPB became a GOP punching bag. Trump has called the agency a "total disaster."
US Rep. Jeb Hensarling of Texas, who is chair of the House Finance Committee, has pushed a bill that would limit the CFPB's abilities to carry out oversight of the payday loan industry.
In October 2017, when the CFPB released a set of rules intended to limit the reach of traditional payday lenders, the Trump administration-dominated Office of the Controller of the Currency (OCC), responded by repealing guidance that has kept banks out of the payday lending industry. The OCC is an independent bureau of the US Treasury Department.
Shortly after Thanksgiving 2017, a month after the rules aimed at the payday loan industry were released, Trump appointed Mick Mulvaney, an outspoken critic of the CFPB, as acting director of the bureau. Many advocates viewed it as a deliberately destructive appointment, similar to the naming of Scott Pruitt to head the Environmental Protection Agency.
In January, Mulvaney said he would not ask the Federal Reserve, which funds the CFPB, for any money for the second quarter of 2017. Of the $177 million it has in its emergency fund, Mulvaney plans to spend that amount down until there is about $32 million left, The Associated Press reported. The financial watchdog also will review its payday lending regulations, as well as its entire operations, the news agency said.
Over the coming months, the fight to preserve the CFPB will likely intensify. For the estimated 12 million Americans caught in the payday loan trap, and the millions whose poverty and lack of access to traditional credit sources leave them vulnerable to payday lenders in the future, the stakes could hardly be higher. Dismantling the CFPB, warns Helm, "would be a free ticket for payday lenders. When you're driving a dangerous road, you don't need access to the ravine."
For 42-year-old Michigan resident Ken Whittaker, the payday lending trap opened up after he got into financial trouble when he cashed his paycheck from his IT support job one morning, and then dropped and lost the wad of cash while buying lunch at a hot dog stand later that day.
Divorced, raising four children and only recently employed again after a long stint of unemployment, with a history of poor credit and owning no credit cards, Whittacker was living paycheck to paycheck.
When he realized he had lost his cash, he went into a payday loan office in Ipsalanti, filled out some paperwork and walked out with $700 in cash.
"I took the $700, paid my bills, which left me with zero dollars. When I got my paycheck I went in and paid off my loan, which left me with no money. So, I took out another loan. I did that for a year," he says.
When he had to pay for car repairs, he took out another loan, meaning that now he had to service two short-term debts simultaneously. Soon, he was paying $600 a month in fees and interest. "Eventually I didn't pay them, and they said they'd take the money out of my bank account. So, I closed my bank account. They sent me to a collection agency," he adds.
Finally, the payday lenders seized his tax refund.
Community organizers around the country say payday lending has become a devastating crisis, exacerbating social divides between those with access to traditional sources of credit and those reliant on storefront payday lending operations.
In Alabama, for example, borrowers are disproportionately made up of African Americans, Latinos, and poor rural Whites who lack access to more favorable forms of credit, says Chris Sanders of Alabama-based Arise Citizens' Policy Project, a coalition organization working with to improve the lives of low-income residents.
In the Trump era, with regulatory agencies facing dramatic change and a growing concern about an effort to roll back consumer protections, advocates working to alleviate poverty are concerned that the payday lending industry is experiencing a golden age. At the federal level, the CFPB is being run by an acting director who is a critic of it. Also, some advocates have expressed concern that the little-known Congressional Review Act might be used to accelerate deregulation efforts.
Even small state-level gains, such as an Alabama requirement that the state's banking department track the number of payday loans issued to make sure that borrowers don't have more $500 dollars in payday loans outstanding, are being threatened by anti-regulators.
"There are forces in Congress looking at preventing any kind of regulation," says Helm, whose grassroots organization is affiliated with PICO National Network. "The Trump administration has a huge emphasis on deregulation, which we're concerned will extend to payday lending and other kinds of predatory lending as well."
Says the 68-year-old New Mexican fighting to stay in his home: "If anybody asks me about payday loans, I'd tell them, 'You'd be better off living on the streets.' They are going to want your money, and it's going to screw up your credit. I don't know how things are going to work out. I'm having to let it all go. If I lose my home, I may have to live on the streets, or with friends. Things are up in the air. I don't know which way I'm going."
Published by Marguerite Casey Foundation.