The Consumer Financial Protection Bureau’s new rules for payday loans and auto title lending have sparked predictable cries of outrage from lenders, especially small store operators who say the restrictions will bankrupt them. And that’s an understandable complaint – after spending five years researching the high-cost credit market, the bureau fired a shot at the core of these lenders’ business model.
But outrage here is not what regulators do. This is how these lenders took advantage of the financial difficulties of their clients. As the bureau’s research shows, payday lenders rely on consumers who cannot afford the loans they take out. With no other way to pay off their original loans than to get more, most of these clients end up paying more in fees than they originally borrowed.
This is the definition of predatory lending, and the bureau’s rules specifically target this problem. They don’t prohibit lenders from offering the kind of financial lifeline they claim to provide – one-time help for cash-strapped and credit-distressed people facing unforeseen expenses, such as a big bill for medical care or car repairs. Instead, they keep lenders from accumulating fees by making multiple loans in quick succession to people who couldn’t really afford them in the first place.
Payday lenders rely on consumers who cannot afford the loans they take out.
The question now is whether lawmakers will attempt to overthrow the office and maintain a financial pipeline popular with millions of low-income Americans precisely because it is the one most readily available to them, online or from consumers. storefront lenders clustered in urban areas. It’s a huge pipeline too – the industry provided $ 6.7 billion in loans to 2.5 million U.S. households in 2015, the bureau estimated.
Advocates of these expensive loans say they are the only option available to people living paycheck to paycheck. The problem is, the typical borrower cannot handle the terms of a payday loan, which require repayment of the entire amount in about two weeks, plus fees.
What these borrowers really need is a conventional installment loan that they can repay over time. This option is emerging in states that prohibit payday loans or encourage small dollar loans to borrowers with uncertain credit, such as California.
The bureau found that 90% of the fees payday lenders collect in a year is from customers who have borrowed seven or more times, and 75% is from those who have taken 10 or more loans. These people are not helped out of an impasse; they are put in a debt trap.
Bureau rules are expected to reduce the number of payday loans and auto securities issued, which critics say is an attack on low-income Americans’ access to credit. A more accurate description is that the rules are an attack on unaffordable credit.
Starting at 21 months, the rules will force payday lenders and auto lenders (who offer short-term loans that use the borrower’s car or truck as collateral) to do the sort of thing banks and Credit unions already do: before extending a loan, they will need to determine if the borrower can repay it. These lenders didn’t bother with this kind of underwriting because it’s expensive, relying instead on high fees (typically, $ 15 per $ 100 borrowed, or the equivalent of an interest rate of at least 300% per year) to cover the high default rate. . The office found that in 2011-2012, almost half of the money loaned by payday outlets was not being collected, hence the need to generate windfall revenue from fees.
The new rules will allow payday lenders (but not those who issue auto title loans) to ignore the determination of repayment capacity if, and only if, they limit the loan to $ 500 or the maximum permitted by the government. state law, whichever is less. To discourage these borrowers from taking out loans that they cannot repay easily, the rule limits them to two more loans of decreasing size over the next 90 days. If he hasn’t paid off his debt within 90 days, he’ll have to go at least a month before getting a new loan.
Some consumer advocates argue that there should be no exceptions and that the rule is not strict enough to prevent payday lenders from plunging borrowers into deeper financial trouble. But the office is right to let these companies try to create a lending business that does not rely on multiple fees for what amounts to one loan.
Payday loan companies and auto title lenders have said they will fight the rule in court, and their allies in Congress are expected to try to pass a resolution rejecting it soon. Lawmakers should not be fooled by the industry’s argument that payday loans and auto titles are a critical source of credit for low-income Americans. As low-income consumer advocates have argued for years with regulators, the issue here is not access to credit. It is a protection against predatory loans.
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