Who Will Step up to the Plate for Borrowers if New Payday Lending Rules Take Effect?
Payday lenders have been some of the only financial service providers to provide small dollar, short term loans to people all across this country. They allow borrowers – many of them lower income American workers – to get access to emergency cash when there is nowhere else for them to turn. Critics of payday lending say that these lenders charge too much in loan fee costs and that borrowers wind up in cycles of debt that take a long time, and a lot of additional fee payments to escape.
Consumer advocate groups have long been on a mission to get rid of payday lending. These folks and organizations pretty much loathe payday loans. But even the people who hate payday lending the most admit that it serves a purpose. Payday loans allow people with bad credit scores, low income, little to no savings and no access to credit cards the ability to borrow money when in need. About 12 million people take out payday loans each year, and they spend $7 billion to do so.
Proposed regulations that the Consumer Financial Protection Bureau recently unveiled may well harm the payday lending industry in a big way. We all know that the financial market abhors a vacuum. If payday loans were to be completely done away with because of the upcoming (and what many people refer to as unfair/unreasonable) rules, who is going to fill the need for smaller-dollar, shorter-term loans that currently fuels the payday lending industry?
When someone takes out a payday loan they usually give the lender a post-dated check or give signed authorization for the lender to debit their checking account when the loan payment is due. Most of the time these types of loans are paid back in just 14 days. Sometimes, though, people can get terms of up to 30 days from some payday lending companies. One reason that some consumer advocates are working to eliminate payday loans is because some people are unable/unwilling to repay their loans on time. This leads to those people extending or rolling over their loans. This can lead to additional fees that some people may find difficult to pay.
The CFPB’s proposed rules would force payday lenders to make sure that a consumer can pay back their loans on a certain date and would also put caps on how many times a person can renew their payday loans. These regulations threaten the payday lending industry’s future and may result in a drop in the industry of close to 80 percent. That may not be a total vacuum in the short term lending industry, but it would without a doubt leave hard working consumers scrambling to find short term lending providers when emergency expenses arise.
Again, this begs the question of how the need for these types of loans will get filled efficiently, and in ways that are beneficial to borrowers if the payday lending industry suffers from serious decline due to the new rules. The big banks are cooking up programs that they may try to introduce. But these are the same institutions that can charge people up to around $40 for overdrafting their bank accounts by just a few dollars. It is unlikely that the banks will be willing or even able to create the right kind of short term loan products that people are in need of.
It really is suspicious how the big banks, credit unions and credit card companies are able to charge whatever rates they want and to impose any kinds of fees they choose to (we’ve all paid those expensive ATM fees, right?) and the CFPB turns a blind eye. But the payday lenders who serve a vastly underserved and in need market continue to be the target of the CFPB’s fury. It just doesn’t seem very fair, does it?