A federal financial watchdog agency may limit the access that millions of Americans – particularly women – have to short-term, small-dollar loans by drying up the market of loan providers.
The Consumer Financial Protection Bureau (CFPB), created in the wake of the financial collapse and designed to protect citizens from being exploited by financial institutions, announced a rule last year that would place new regulations on providers of small-dollar, short-term loans – also known as pay day loans. Some of the regulations would limit the ability of lenders to recover payments from borrowers and others would make it more difficult for people to secure a loan.
The CFPB may be ready to implement the rule and the impacts on both borrowers and lenders could be devastating.
Women are going to be hurt if this rule is implemented. According to Pew research, most payday loan borrowers are white, female and between the ages of 25 and 44 years old. Other demographics of borrowers are those with less education, are renters instead of homeowners, and are single parents.
While you might assume borrowers secure loans for a one-off, surprise expense such as broken pipes after a snowstorm or a medical bill for a sick child, most borrowers use the loans to cover ordinary living expenses.
Although the economy is at “full employment,” wages have been relatively flat for American workers, leaving them not that much better off. Thankfully, other avenues to generate income are emerging through the sharing economy such as driving for Uber and Lyft or renting out space in your home on Airbnb, but those options aren’t available to everyone and it can take time to start generating income.
The free market responded to the need of borrowers, who can’t get loans from traditional lending institutions or family and friends, with small-dollar loans – usually between $100 and $500 – that carry interest rates and fees that protect the lenders, who are taking on big risks.
Some 12 million Americans borrowed money from 20,000 storefront lenders and hundreds of websites. This industry employs 50,000 people and mostly in low and moderate income communities.
If the CFPB’s proposed rule kicks in, according to their own estimates, payday lenders would lose three-quarters of their revenue. Many would be forced to shut their doors and lay off workers.
What happens when women and men lose access to this source of credit? Their needs don’t disappear, but they turn to other –potentially more financially devastating—sources.
In Georgia and North Carolina, two states that banned small-dollar loans, analysis shows consumers bounced more checks, filed for Chapter 7 bankruptcy protection at a higher rate, and complained more to the Federal Trade Commission about lenders and debt collectors. One Federal Reserve center in Atlanta return 1.2 million more checks per year after the ban and at $30 per item depositors paid an extra $36 million per year in bounced check fees.
If the goal is to end the “predatory debt trap” talked about by proponents of a greater crackdown by the CFPB on lending institutions, this is not the way to do it. Once again, the need for funding does not disappear even if the payday lenders do.
My colleague Charlotte Hayes shared her own experience with payday loans. She explains why the painful lesson of borrowing a payday loan is the best deterrent to irresponsible borrowing in the future:
As a free-lance writer, I sometimes wrote checks that I just knew–just knew–I would be able to cover. An expected fee would in the mail before the check got to the bank and I'd be fine. Alas, such fees didn't always arrive in time for me to beat the check to the bank. Let me tell you something about those “unfair” overdraft fees: they hurt like hell. Especially if you are just getting by. They are, in fact, so painful that it’s been decades since I’ve had one. The mere thought of an overdraft puts my stomach in a knot. So, in a way, they do the job.
Let’s also not forget that if lenders are restricted out of work, that leaves tens of thousands of workers without a job. Until they can find work, they too may be looking to solve short-term cash needs.
Payday-loans are a market solution to the tough problem of income shortfalls and a lack of access to traditional credit. We want Americans to be responsible with lending, but strangling an industry that provides choices to consumers forced them to turn to other behaviors such as bouncing checks and that is not the solution anyone wants.