Ending Payday Lending Would Harm Consumers: Consumer Financial Protection Bureau’s Proposed Rule Threatens to Cut off Access to Credit for Those Who Need It Most
Payday loans are unsecured short-term loans made at storefronts and online. The average loan amount is $375, ranging generally from $100 to $500, most often due in two weeks or on the borrower’s next payday. They are most frequently used by constrained consumers who have few or no liquid assets and limited opportunities to borrow on credit cards or from other mainstream lenders.
The Consumer Financial Protection Bureau (CFPB), a regulatory agency established by the Dodd-Frank Act, is set to issue a rule that could destroy most of the payday loan industry. On June 2, 2016, the CFPB published a comprehensive notice of proposed rulemaking covering payday loans. Three fourths of the nation’s 20,000 storefront payday outlets will be rendered unprofitable and forced to close by the CFPB’s rulemaking.
Severe restrictions on the supply of payday credit will not eliminate the demand for these loans. Borrowers will not stop seeking the credit they need. It is precisely under these circumstances that illegal lenders thrive.
Borrowers and lenders should retain the ability to fashion their own market based credit solutions based on the borrowers’ individual circumstances and the lenders’ risk appetites. The effect of the CFPB rule will be to prevent fully informed parties from entering into the business relationships they voluntarily choose.