William K. Black
January 14, 2019 Bloomington, Mn
Kate Berry, the American Banker reporter that covers consumer financial protection, has written another important article about the continuing horror story of Trump’s increasingly successful efforts to pervert the Consumer Financial Protection Bureau (CFPB) into an agency dedicated to harming consumers and protecting our Nation’s most predatory lenders. Unfortunately, her January 14, 2019 article is behind a paywall.
The Predatory ‘Sweet Spot’
The context is one of the CFPB’s most important and useful anti-predatory lending rules by payday lenders. Payday lenders often charge working class Americans interest rates well above 100 percent. (In Missouri, a hotbed of predation, they can charge more than 500 percent.) The ‘sweet spot’ for payday lenders is borrowers who will be unable to repay promptly the initial loan (with an obscene, but vastly lower initial interest rate). This sets off a cycle of additional borrowing and extending of payday loans that places the borrower into a debt spiral that frequently results in bankruptcy. Payday lenders, who exist to predate on customers, make their extraordinary profits largely from borrowers who cannot repay the initial payday loan when it comes due, but have some income and will continue to reborrow and attempt to repay for months. Predatory payday lenders optimize by finding this ‘sweet spot’ of those who have enough income and a compelling intent to repay – but not enough income to pay off the entire series of loans.