Last week, the Consumer Financial Protection Bureau (CFPB) proposed a set of rules to federally regulate payday lenders. Payday lenders provide loans to consumers who might otherwise be unable to obtain loans, charging fees that can equal upwards of an annualized rate of 400%. Borrowers often then get stuck in a debt trap—borrowing additional funds to pay off these high-interest loans.
The proposed CFPB rules would limit interest rates to between 28% and 36%, require lenders to assess borrowers’ credit histories, and limit payday lenders’ ability to access a borrower’s bank account. Perhaps most importantly, the rules would limit the number of successive loans lenders could give to any one borrower. These successive loans are what form the bulk of the lenders’ profits, and what create spiraling debt for borrowers who can ill afford it.
In recent years, the payday loan industry has become a popular target of congressional attacks, satire, and corporate public relations campaigns. Most of these criticisms boil down to what Sarah Silverman put succinctly during a 2014 appearance on Last Week Tonight: “[I]f you’re thinking of getting a payday loan, just simply pick up the phone, and then put it down again and do literally anything else.”
But regulating this industry turns out to be a lot more complicated. Prior state experiments to impose even basic limits on interest rates have not achieved the desired outcomes. Payday lenders have thus far been unwilling (and possibly unable) to exist in markets where they only make a maximum of 25 to 42 percent interest, due to high overhead costs. Some other states have experimented with outright bans, which resulted in tens of millions of dollars in bounced check fees. These experiments show the risk that increased regulation will fail to improve the financial situation of the 19 million lower-income U.S. households who depend on these loans. Actual payday loan borrowers do not, as a whole, support increased regulation of the industry.
Given this reality, it is not surprising that CFPB’s proposed rule-making has been criticized as doing both too much and too little. Most people seem to agree that something needs to be done about predatory short-term lenders. Without an obvious alternative, it is not clear that the right solution is to impose strenuous limits that may shut down the payday loan industry entirely. Some sort of lending alternative needs to exist for people not currently being served by the financial-services industry. Professor Mehrsa Baradaran, author of How the Other Half Banks, suggests postal banking as a solution. Sheila Bair, former Chairperson of the FDIC, suggests better incentivizing banks to go into the short-term loan business.
What do you think? Will increased federal regulation of the short-term loan industry result in a better outcome for those living paycheck to paycheck?
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