There are people who face emergencies and don't have kindly relatives to bail them out and thus resort to pay day loans.
The bureaucrats who work for the Consumer Financial Protection Bureau (where they pull down notoriously cushy salaries) do not fall into this class. So they are probably giddy with rectitude for having found a way to almost eliminated pay day loans as source of credit for people who lack their taxpayer-funded salaries.
The CFPB just released a set of regulations that will make it all but impossible for people to get payday loans.
Before we proceed–yes, payday loans are in general a bad idea. The interest is high, but guess what? They can bail out somebody in a pinch and sometimes the high interest rate beats the consequences of not being able to get the money. Another consideration: people should be able to make their own mistakes and learn to manage their own finances.
The Wall Street Journal notes hat pay day borrowers generally weigh the pros and cons of a pay day loan before getting one:
CFPB officials are swanning around as protectors of the proletariat, claiming the new rules will end a “cycle of debt” in which borrowers are conned into taking out one exorbitant loan after another. Yet customers—most of whom earn between $25,000 and $50,000—tend to know what they’re doing. One recent survey by Harris Interactive suggested that more than 90% of customers “weighed the risks” carefully and agreed the lender “clearly explained the terms.” A Columbia Law study found borrowers could predict accurately when they’d be able to pay back the loan.
Ronald Rubin explains in the Weekly Standard what the CFPB has done:
Despite strong opposition from federal and state elected officials of both parties, including a bill sponsored by Democratic National Committee chair Debbie Wasserman Schultz, the Consumer Financial Protection Bureau is about to eliminate the only credit available to millions of low income Americans. Earlier today, the bureau unveiled proposed regulations so onerous that they will make many payday loans, deposit advance products, open-end lines of credit, and vehicle title loans unprofitable.
The CFPB's main target is payday loans, which are generally limited to $500 or less, must be repaid every two weeks, and come with fees around $15 per $100 borrowed. More than two thirds of states have exempted the loans from interest rate caps. Studies consistently find that consumers like payday loans and understand their terms. The meddling bureaucrats think they know better.
The heart of the 1,334-page rule proposal is a requirement that lenders do a lengthy investigation and analysis of borrowers' ability to repay the small loans. The process will be so costly that it won't be a serious option, especially since anyone who passed the test would probably have no trouble repaying his or her loan without subsequent loans. A borrower who doesn't clear the ability-to-repay hurdles can still get a loan, but will be limited to two progressively smaller loans to repay the first one.
The CFPB was created by the Dodd Frank law which prevents the CFPB from capping interest rates. But the agency gets around this by making so many regulations that it becomes almost impossible to use the pay day loan system.
It can't be denied that consumers of pay day loans pay prices that people with more organized lives and better credit would not face on a normal bank loan. Nevertheless, what the CFPB is doing doesn't help these people:
It is not consumer protection. The barriers to offering payday loans are low, so rival lenders must compete for customers by reducing fees until excess profits disappear. As the CFPB's director, Richard Cordray, recently testified, "It's actually a difficult product economically; there's high costs involved in defaults, there's high costs involved in customer acquisition, so there are not supernormal profits being made."
And yet opponents continue to call the loans "predatory" because the $15 fee can be characterized as 15 percent interest on a two-week loan, multiplied by 26, and tagged with a usurious 390 percent interest rate.
Discussing annualized interest rates on payday loans as if they were secured mortgages, auto loans, or even credit card debt is absurd. A big part of every payday loan fee is not interest at all. Rather, it is the cost of manufacturing the product – the store rent and salaries that create access to emergency cash. Consumers are willing to pay for convenience. ATM fees are not labeled interest.
. . .
At a Congressional hearing last year, a consumer advocate testified that the interest rate for payday loans should be capped at 36 percent, the legal limit for loans to armed service members. A congressman responded with a question that perfectly illustrated the fallacy of converting payday loan fees into annualized interest rates: Would you loan me $100 for two weeks in return for one dollar? That's about a 36 percent interest rate.
The obvious answer is no because the dollar earned is not worth the risk of losing $100, especially when the borrower is financially strapped. The fate of that $100 rests in the same precarious hands whether the loan term is two weeks or one year. Risk rather than time drives current interest rates, so even if convenience-related fees are characterized as interest, 15 percent, not 390 percent, is the fair measure of payday lenders' avarice.
It would be nice to think that regulating day loans into oblivion would mean that people who have iffy credit get their houses in order so that they will not face emergencies that currently drive them to pay day loans. CFPB head Richard Cordray promises that banks will come up with less expensive loans for people who ordinarily would have used pay day loans.
But that is not what is likely to happen. Financial institutions will stall on creating such products (after all, they need to remain solvent) and the people who once obtained these loans will have other alternatives:
The CFPB's media machine will trumpet the demise of the evil payday lenders and herald the imminent arrival of cheap rescue products. In the meantime, the remaining options for many cash-strapped Americans will be loan sharks, bankruptcy, and crime. Bouncing checks, which incurs a stiff penalty, is another option.
But the people who are making these rules have never known what it is like to need, say, $500 to fix the car to drive to work the next day. As the Wall Street Journal explains:
Google recently announced that its search engine would ban payday advertisements, probably as a favor to the Obama crowd, and the CFPB rules are supported by progressive elites who have never had to choose between paying rent and feeding their children. The workers and customers of the payday industry are merely collateral damage in another ideological Obama crusade.
It should also be noted that a leading advocate for destroying pay day loan companies is the Center For Responsible Lending. A center affiliate is the Self-Help Credit Union, with $600 million in assets, that reportedly would love to get CFPB’s nod to compete with the payday operations. .
Whatever you think of pay day loans, they arguably are better than crime or bounced checks. They can clients an opportunity to handle an emergency with an unpleasant stopgap action and then pay off the loan and have the opportunity to put their houses in order.