Prepare your countdowns, as it looks like federal regulators are gearing up to drop a bomb on the payday lending industry. Thursday, the Consumer Financial Protection Bureau new proposed rules that would completely change the way lenders do business, preventing them from burdening customers with unpayable debt.
Unless you are Debbie Wasserman Schultz or one Republican of Congress, chances are you won’t shed many tears at this news. After all, payday lenders, who specialize in providing short-term loans to three digits Interest rates for cash-strapped clients are the street-level face of predatory finance – one of the most grotesque manifestations of the fact that in America it is extremely expensive to be broke. And while many states have cracked down on their activity, others have let them run wild. Federal intervention was probably overdue.
In theory, the offers regulations are designed to prevent payday loan recipients from over-borrowing (these new restrictions would also extend to auto title loans, a popular option in states that have limited payday loans). But they really strike at the heart of the whole business model of the industry. The rules would require lenders to check their customers’ credit and verify that they can afford to pay off their loans while covering basic expenses. They would also make it more difficult for borrowers to take out one loan after another, as is now common. If borrowers wanted to renew their debt or take out a new short-term loan within 30 days of paying off another, they had to show that their personal financial situation had “significantly improved” (of course, fast – a loan payday is not usually a sign of financial health). After three successive payday loans, the client would be required to take a 30-day “cooling off period” during which they could no longer borrow. Finally, the new regulations would prevent lenders from hitting their customers with excessive penalty fees.
Implemented successfully, these rules would end payday loans as we know them, period. Currently, payday loans are extremely convenient for people who need cash in a pinch, especially if they live in a poor neighborhood and alternative credit options are scarce. More or less anyone can walk into a convenience store and get a loan, as long as they provide a recent pay stub and bank account information. Adding an entire underwriting process to that would make things more expensive for the lender, slow down the transaction, and obviously prevent many potential customers from borrowing. Limiting the number of consecutive loans people can take out would arguably be even more damaging to the industry, which largely benefits clients who are trapped in debt. While the typical payday loan can last only two weeks, the CFPB found that 80 percent are be overthrown or renewed. “Half of all loans are in a sequence of at least 10 loans”, he noted.
How much business could payday lenders lose under these new rules? It’s hard to say precisely. But earlier this year, CFPB ran a simulation that assumed regulation would use a 60-day cooling off period and concluded that storefront lending volume would drop. 69 to 84 percent. Even if the volume were to drop only 30% or 40%, that would be devastating for the industry.
Under the proposed rules, payday lenders can avoid certain restrictions on who can borrow if they offer loans designed to be paid in full after no more than two renewals. But the CFPB believes that switching to this system would further reduce the overall volume of loans from more than half, while decimating the profits of the expenses. The point is, if these rules come into effect, they will allow the industry to adapt. They would likely inspire creative workarounds as well. More lenders would likely try to operate online, by moving their business overseas, or settling on Indian reservations. Some would undoubtedly try to create new loan products that are not covered by the proposed regulations. But the restrictions would be a big blow. “I have no doubt that there will be a new form of high cost loan. You are going to see this cat and mouse game, ”Mehrsa Baradaran, professor of law at the University of Georgia and author of How do the other half-banks, said. “But at least the cat is careful, and he’s a great cat.”
The question then is: what happens to customers? Currently, some 12 million Americans use payday loans. On average, they tend to be lower middle class rather than poor, and most say they use credit to cover recurring expenses, such as food and rent, rather than living expenses. emergency. Payday loans can be predatory, but there is also a real demand from a wide range of customers who need credit to get by.
There is a school of thought that says these people would be better off with no way to borrow, rather than facing the easy temptation of walking to their local EZMoney or Cash America store. A consumer advocate once told me bluntly, “For people who cannot live on their regular income today, a loan is not the answer. Borrowers themselves usually say they would cut expenses, depend on their families, or turn to a credit union or bank if payday loans were not available. But it’s hard to say how realistic these options are for your typical payday client, if they were realistically, you would expect fewer people to rely on short-term usurious debt.
That is why, if the federal government is truly gearing up to blow up the payday loan industry as it currently exists, it is all the more important that we look for other ways for low income families to ” get short-term credit. This could include creating new incentives for banks and credit unions to take over (past efforts have been less than successful) or looking for something more radical, like Postal bank. As Baradaran told me, “you really have to combine any regulation of an incredibly popular product with an alternative. Otherwise, you will end up harming the very people you are trying to help.