The Consumer Financial Protection Bureau (CFPB) has proposed new regulations aimed at disrupting payday lenders that provide short-term loans with high interest rates and fees (NPR).
In the United States, payday lenders outnumber McDonalds and Starbucks combined (Last Week Tonight). With interest rates that can surpass 500 percent, the industry has a reputation for predatory lending that disproportionately falls on poor and minority individuals. Google bans them from advertising on its site (New York Times).
The new rule is designed to protect borrowers from becoming trapped in ever-mounting debt by requiring lenders to verify that borrowers are capable of repayment under the terms of the loan. It would also limit the number of successive loans borrowers can take out. It has the potential to seriously impact the industry, as its business model relies on a portion of borrowers being unable to make payments, forcing them to roll their debt over into additional loans. CFPB research has found that 80 percent of single-payment loans end up being re-borrowed within a month.
Some feel the CFPB hasn’t gone far enough (Pew Charitable Trusts). While the rule would limit the pool of individuals eligible for loans, it won’t cap interest rates. Currently, sixteen states and Washington, D.C., limit interest rates, which has kept the industry at bay in these places. The CFPB rule won’t preempt state laws, butsome fear state governments will buckle under pressure from industry lobbyists to lift these caps as a compromise (Morning Call).
While some find their practices reprehensible, others argue payday lenders are simply filling a market need(The Conversation). According to the Federal Reserve, 46 percent of U.S. households report they would have trouble paying for an emergency costing $400. The typical payday loan borrower has poor credit or does not own a credit card and would have difficulty finding quick cash from other sources. Some fear the CFPB is simply playing “regulatory whack-a-mole,” forcing borrowers to seek loans from even less-savory individuals.