CFPB rule proposal – too strict for payday loan consumer access and lending providers

CFPB Rule Proposal: Bad for Payday Lenders and Borrowers

More than 12 million people regularly make use of payday loans, cash advances, and higher interest installment options, which are short-term loans that are easily obtained and require less scrutinized checking of credit or more limited background checking options. Payday loans typically serve those consumers who have no other access to ready cash, such as credit cards, savings accounts, or lines of credit. Usually, payday loans or cash advances are used for emergencies or temporary cash shortfalls so that the borrower can continue to put food on the table and keep the utilities turned on. They’re not used for fancy restaurant dinners or expensive clothes. Although to each is their own and we always recommend to borrow modestly and repay responsibly.

New regulations introduced by the Consumer Financial Protection Bureau, or CFPB, have made the procedure more difficult for those who use payday loans and also for those lending companies who provide them. The CFPB describes itself as the “government agency that makes sure banks, lenders, and other financial companies treat you fairly.” To quote former President Ronald Reagan, “The scariest words in the English language are “I’m from the government and I’m here to help.” Many have stated that Richard Cordray, who has now stepped down after his almost 8 year run, was one of the most powerful men in the nation. Running a department with limited oversight who can get his high powered fingers in just about anyone’s business, consumer or business.

Under the new regulations, payday lenders are now required to report their borrowers’ personal data to the credit bureaus, including Equifax, the company that recently revealed that confidential data on millions of Americans had been compromised more than 50 times in the past two years.

One of the advantages of a payday loan has been that no credit reporting was involved, making it convenient for those with no credit, bad credit, or poor credit. Regulators argue that those who repay their payday loans in a timely manner should have that reported to the credit agencies so that they can build their credit score. However, this is disadvantageous to those who may have the occasional difficulty with repaying the loan or those who have never used a payday loan and have credit issues. Believe it or not, there is a large portion of the population who would like to have good credit, but they just don’t care. They like these loans because they continue to stay off the radar and although people do default, the service of lending small dollar loans still works. The interest is higher because the risk is there, however, people who take out these types of loans can get a second or third chance to borrow. If you have bad credit, as long as you have a job or provable income, you can get another one.  People who need a short term advance, count on the money to get through if needed and then repay as best as they can. If they do not have access to this small, much needed lending option, less money is spread throughout the economy and you have more folks under bankruptcy that have no cash for food, bills, incidentals, etc. Then you have more people on government programs and using more of our tax dollars, instead of allowing the consumer to try to get through life on their own. Would you like to be completely broke with no money, or borrow money and work on paying it back?  At least if you can borrow, even for short term, you have money in your pocket!

The new regulations require payday lenders to lend by determining a customer’s ability to repay the loan; this usually involves a credit score. Given the demographics of payday lenders, this may essentially force the lenders out of business and increase the proliferation of loan sharks and their predatory rates.

Most borrowers who obtain payday loans indicate it’s not their first choice for financing, but they are glad the option is available to them. Payday borrowers are usually blue collar workers who live from paycheck to paycheck and lack the credit cards or savings accounts that many Washington bureaucrats seem to take for granted.

Surveys indicate that many payday borrowers prefer the payday loan companies to their traditional banks because they’re more transparent, more easily accessible, and in many cases, provide superior customer service than that received in many traditional lending institutions. Can you believe this? No ones talking about this minor detail, but believe it or not, you can get better customer service from a short term lending institution than your local bank or credit union? Absolutely you can. Your local lender will have a level of expectations, vs a cash advance lender knows times are hard and wants to verify income and lend you the money today.

Be that as it may, government regulations were instrumental in the proliferation of payday loan companies, which now outstrip coffee shops in growth. The Durbin Amendment caused overdraft fees to almost double in a few years because it limited the credit-card-processing fees that banks could charge merchants. This limitation cost banks billions of dollars annually, so their solution was to substantially increase the cost of overdraft fees to consumers. Does this make sense to the consumer? The CFPB wants to restrict access to short term lending, but allows banks and credit unions to charge larger over draft fee’s because there is a cap on how much the banks can charge you for your debit card fee’s and usage when you use the card. Banks charge you when using an ATM outside your bank, then your bank charges you as well. They get you comming and going, however the media makes it seem as though payday lending and short term loans are such a bad thing. Much smaller media coverage on traditional bank lending. More than half of those who are overdrawn in their checking accounts now utilize the service of payday lenders because it’s less expensive than the bank’s exorbitant continued overdraft fees. This option can dramatically reduce the bank’s revenues from overdraft fees but is of significant benefit to financially strapped consumers.

An impact analysis conducted by the CFPB indicates that the new regulations could reduce the availability of payday loans by about 75 percent. This means about $11 billion dollars of credit will no longer be available to those who need it the most. This would be a significant reduction in economic contribution.

The Congressional Review Act can reverse the rulings of this imperious and self-serving regulatory agency. Lawmakers can serve their constituents by overturning this regulation within the next 60 days and enabling their cash-strapped constituents to keep food on the table and their utilities turned on when they run short of cash before the next payday.