Is the CFPB Crack Down on Payday Loans In the Public Interest?
The opinion split on this question is almost
completely predictable from prior political leanings. Those
on the right view it as excessive regulation that is
blatantly inconsistent with the Trump administration’s goal
of repealing and relaxing Federal regulations of all types.
Those on the left view it as the long-needed remedy for
abusive practices directed toward consumers facing financial
troubles who have no better options. Many in both camps take
a stand without fully understanding the major issue
Payday loans are small loans generally in the
$150-$400 range, repayable in a few weeks when the borrower
is due to receive a paycheck or some other scheduled
payment. The loan is designed to tide the borrower over
until the payment is received. The cost of a loan is usually
$15 to $20 for each $100 borrowed, regardless of whether
repayment is due in one week, two weeks, or 4 weeks.
Payday loans are convenient, quick, and readily
available without a credit assessment. To assure repayment,
borrowers provide lenders with direct access to their
deposit account; in effect, borrowers authorize lenders to
repay themselves from the borrower’s account. In some cases,
borrowers secure their loans by pledging the title to their
Lenders are required to determine whether the
borrower can pay the loan payments and still meet basic
living expenses and major financial obligations both during
the loan and for 30 days after the highest payment on the
loan...To support the full-payment test, the lender must
verify income and major financial obligations and estimate
basic living expenses for a one-month period—the month in
which the highest sum of payments is due. The rule also caps
the number of short-term loans that can be made in quick
succession at three.
The industry claims that the rule would force them out
of business, and while they might say this even if it were
not true, all indications are that it is true. The
documentation requirements would result in a significant
increase in loan origination costs, which can make small
loans uneconomic. In addition, lenders would lose the most
profitable part of their customer base.
An earlier study by CFPB found that among a sample of
payday borrowers, only 13% had 1 or 2 transactions during
the 12-month period covered by the study, suggesting that
the cautious borrower segment is small. 39% of the borrowers
had 3 to 10 transactions, and 48% had 11 or more
transactions. That 48% produced 75% of the loan fees, and an
even larger part of lender profits because repeat borrowers
require no marketing expenses. This suggests strongly that
heedless borrowers comprise a large part of the market.
The core issue then is whether a market should be
maintained that is useful to a minority of those who use it
but is addictively harmful to a much larger group whose
patronage is needed to keep the market alive. The issue is
much like that involving gambling casinos, which also have
addictive clients. The difference is that gambling addicts
are a very small percent of casino patrons whereas payday
loan addicts are a substantial percent of payday borrowers.