The Consumer Financial Protection Bureau is cracking down on abuse by lenders – but to address the larger debt crisis, officials need to broaden their approach

If crusaders as various as the comedian John Oliver and federal agents get their way, predatory lenders and debt collectors will soon find it a lot tougher to profit from the plight of the most cash-strapped of Americans.



Oprah Winfrey may have given away refrigerators, laptops and even cars, but in a single movement, Oliver gave away something more. He recently joined the “grimy business” of debt collecting and bought up and canceled $15m of medical debt owed by 9,000 people.

Oprah’s audiences got stuff, but Oliver’s beneficiaries will be able to sleep at night, and answer the phone without worrying that the guy on the other end will be a collector who resorts to blatantly illegal extortion – even threatening to kill pets or dig up the bodies of dead relatives.

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The debt collection industry, virtually unregulated, has more problems than just Oliver. As the jobs recovery sputters along, even those who do business within the letter of the law have found it harder to get cash-strapped Americans to cough up.

Even if you’re not on the receiving end of one of those calls today, you may be tempting fate tomorrow. CardHub calculates that the average American today has about $7,879 in credit card debt, a seven-year high and only $500 away from an unsustainable level. On top of that, student debt loads have exploded – as have defaults on those loans. Add auto loans and mortgages to that mix, and you’ve got a country drowning in debt.

Looking at credit card data alone, the average American today has 52% more debt than she carried only a decade ago. Tough medical expenses, college tuition bills, rent and/or mortgage payments continue to rise, wages stay largely flat; it’s hardly surprising that debt grows everywhere from the emergency room to the movies and the grocery store.

Oliver’s bully pulpit should draw attention to the epidemic of abuses perpetrated as some lendersroutinely violate federal rules to winkle something out of a debtor – and then sell that debt to the next collector in a chain, often for pennies on the dollar. In the worst cases, collectors pursue people who don’t even owe money, or insist people who already settled a debt still owe.

Then there are the payday lenders, to whom Americans can turn when there’s no credit left on their cards and the rent is due, or groceries or medications need to be purchased before the next paycheck arrives. It sounds like a great idea, both for the borrowers who need quick access to cash and for lenders – except that the lenders charge interest rates as high as 400%, and as many as 25% of them roll over loans into new loans. This means debtors end up paying more in fees than the value of the original loan, which they never pay off at all.

Meanwhile, lenders collect about $7bn in fees annually.

Until now, payday lenders haven’t even had to do a basic test to gauge whether their “clients” can repay their loans. A new rule announced by the Consumer Financial Protection Bureau (CFPB) earlier this month will change that.

Lenders won’t be able to take possession of borrower’s car title, for instance, and will be limited in the number of times they can try and deduct payments from customers’ bank accounts. Fees for doing so result in an average of $185 in penalties for about half of borrowers, the CFPB found, and can lead to those borrowers losing their bank accounts. Without a bank account, life becomes even more expensive for struggling American families, who now must pay hefty fees just to cash a check or pay a bill.

The agency likely will follow its rule with others aimed squarely at abusive behavior by debt collectors, prepaid credit cards, and bank overdraft fees.

The problem is that the CFPB won’t be able to come to grips with the real issue: Americans simply need something to help make ends meet.

Right now, the CFPB’s war is a bit akin to the war on drugs, attacking the supply side. That’s well and good, but if it doesn’t solve the demand side of the equation, there will be no long-term fix. Without a long-term fix, the predators and their products simply change their identities.

There is still demand for loans that fill the gap between what Americans earn and the cash they need. People need some kind of credit card, and don’t have a bank account or a credit rating – thus a prepaid card fits the bill. Americans don’t earn enough money to cover their costs, and must rely on debt – inevitably, someone wants to collect that debt.

The crusaders are right to try to change the system, but let’s not fool ourselves about what comes next. When an established author can’t find $400 in an emergency and needs “to juggle creditors to make it through a week”, we’re in the midst of a debt crisis that isn’t just about abuse.

There are signs that the payday loan industry already is starting to mutate, to the point where it will no longer be possible for the CFPB to regulate. Uber announced plans to make cash advances of up to $1,000 available to its drivers in California and Michigan. While Uber won’t charge interest, it’s entirely possible that other employers could follow suit but levy some kind of fee. Or borrowers just end up in the hands of the, ahem, informal payday lender, aka their friendly neighborhood loan shark.

Similarly, an overdue crackdown on predatory practices may result in a rush of bankruptcies: if debt collectors are required to do business ethically, therigor may actually push more debtors into bankruptcy, with all its short- and long-term consequences.

The problem runs far deeper than noxious behaviors – to the debt burdens we carry, flat or declining incomes and the willingness of some financial firms to take advantage of our indebtedness.

The CFPB should combine its fight against predatory firms with something new and different – it could champion new lending models designed to help improve Americans’ debt and cash flow. At the very least, it could sponsor discussions and debates about what new models might look like, given that it’s unlikely that we’ll be living debt-free lives any time soon.