If you want to see what loan sharking looks like in modern America, look no farther than the payday lending industry. As this blog from the White House (yes, 1600 Pennsylvania Ave. blogs) points out, 20 million Americans use payday loans — and the average interest rate charged on a two-week loan is 400 percent!
The White House used a $100 loan as its basis. From a payday lender, a Benjamin winds up costing the borrower $16. If you accept that 20 million figure, this means that on $100 loans, the payday lending racket is bringing in $320 million every two weeks. OK, that's simple math and may not represent reality. But perhaps not that far off, as some borrowers will borrow more, some less.
Just for context, 20 million Americans equals 6.5 percent of the population. That's an alarmingly high number of people who are exposed to a horrifically high level of short-term interest. But it also explains why the payday lending business has taken off.
The White House is posting in this topic because the new Consumer Financial Protection Bureau finally has a leader, thanks to President Obama's recess appointment of Richard Cordray as Director. It seems that payday lenders, which aren't banks in the regulated sense of the term, are high on the CFPB's list of targets:
The CFPB’s approach to nonbank examination will be the same as its approach to bank examination. It may include a combination of any of the following tools: requiring nonbanks to file certain reports, reviewing the materials the companies actually use to offer those products and services, reviewing their compliance systems and procedures, and reviewing what they promised consumers. In general, we will notify a nonbank in advance of an upcoming examination.
This doesn't mean that payday lending will go away — it's evidently a $50 billion yearly business, up fivefold from its lending levels in the early 2000s. And that's with it being declared illegal or rendered infeasible in 13 states!
But at least borrowers have a federal regulator dedicated to explaining to them how egregiously they're being gouged.