The rule regarding payday loan providers must not pass
The rate of workforce participation is 62.8% – the lowest since the Carter administration. This bleak economy is the result of the reckless monetary policies of past presidents. As a result, 40% of Americans do not have enough money to cover any unexpected expense of $400. Over twelve million Americans depend on payday loan to meet the needs of their families. This economic mess has been created by President Bush and Obama.
The Consumer Financial Protection Bureau proposed to heavily regulate the payday lending industry in June. With the Small Dollar Lending Rule, the bureau wants to solve the weaknesses of the present rates and payday lenders by asking the lenders to analyze and verify the housing costs, income and legal and credit obligations. The proposal is intended to safeguard the interests of the low-income families from getting caught in the debt trap. For an instant, the proposal might seem like it is aiming to solve the problems of the industry. However, these policy-makers are not aware of the actual state of the market because they make decisions sitting in their air-conditioned offices. The very fact that bureau regards the short-term loan industry as “dirty” is reason enough to believe that they are prejudiced or manipulative.
One of the arguments in favor of the new legislation is that the interests of the borrowers and lenders are not aligned. This is because the profitability for such lenders depends on the loans being unaffordable for consumers. But, doesn’t this argument actually stand true for any kind of industry selling a product?
For instance, let us consider the cost of an iPhone. How much do you think is the price of iPhone versus the price that customers pay for it? The production of iPhone 6 only costs $200.10 and the phone is sold for $699. Even then, policy-makers are not making any regulations for Apple to protect customers. So, why should only the short-term lenders be held responsible? Shouldn’t these lenders be allowed to charge a rate of interest that makes up for the huge risk that they are taking by giving money out to low-income borrowers?
On an average, payday lenders charge $15 per $100. This profit margin is very less as compared to what Apple is charging for its phone.
The problem with the arguments put forward by CFPB is the fact that they are ignoring the fact that short-term lenders are a necessity. The need of the borrower’s to loan is much greater than the rate of interest or risks involved.
To simply put it, short-term lending has short payment periods because longer periods would defect the entire purpose of the business model and make it irrelevant.
If CFPB’s proposal were to be implemented and followed, it would cost payday lenders money. The expense of finding out the government-imposed information would handicap the short-term lending market from loaning money at the present rates of interest. It will force the short-term lending businesses to shut down or borrowers will have to borrow large sums of money for qualifying to apply for a loan.
Even though a lot of people do get caught because of their inability to repay the loans due to bad finance, a majority of short-term borrowers are actually in full support of payday lending businesses. As a matter of fact, over 98% of the submissions at CFPB’s “Tell Your Story” were personal stories that were positive regarding short-term loans. Since the bureau was not satisfied with the submissions, they chose to hide it from the public. However, they had to release it because of the Freedom of Information Act.
Policymakers who continue to think that the payday loan industry is as bad as it comes, they have probably not attended their economies class in college. The numbers used by CFPB are outright false and manipulative. Therefore, the Small Dollar Lending Rule mustn’t be allowed to pass and it should be removed.
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