Most middle-class people don't resort to payday loans, but such loans can get people out of a difficult situation. Richard Cordray, director of the Consumer Financial Protection Bureau, seems to regard people who take these short-term loans as victims.
The CFPB has finalized rules aimed at making payday loans impossible. Cordray is arguably overstepping his legal authority in making these rules. The Wall Street Journal explains how the new regulations would work:
The new rule requires lenders to conduct a “full-payment” test to ensure that borrowers can repay the loans and fees within two weeks while meeting other major financial obligations. Short-term loans that customers can roll over are capped at three, and lenders are barred from debiting customer checking accounts after two unsuccessful attempts at collection.
These restrictions may seem well-intended, but they in effect allow loans only to unprofitable customers with good credit and prevent lenders from taking recourse against borrowers who don’t pay their bills. As a result, many Americans will lose access to an important source of emergency cash.
Mr. Cordray is outraged that “lenders actually prefer customers who will re-borrow repeatedly rather than simply repaying the loan when it comes due.” Yet this is how credit cards make money too.
While he portrays borrowers as unwary victims, most understand their options. A 2009 study by George Washington University found that about half of borrowers surveyed had considered other credit alternatives, and more than 80% lacked funds in their bank accounts to cover expenses. Payday loans can prevent borrowers from incurring more expensive overdraft fees.
How people manage their finances is an intimate thing. But the CFPB should not shut off this avenue to people who get in a bind and need funds for an emergency. As long as people know how it works going in, it is their choice. I know someone who, in a bind, got a payday loan–no, it is not a middle class thing to do, but it got him over a hump.
The experience was sobering–nobody takes a short-term loan with onerous interest rate unless he is facing an emergency or some sort. My friend wasn't a victim, and he learned some valuable financial lessons from the epxerience, which he regarded as a wake-up call about the need to have emrgency resources. The CFPB has no right to intrude into this kind of personal financial decision.
The Wall Street Journal editorial goes on to cite a study of how households managed in two states where payday loans had been banned. The study found that in the two states where loans were banned, Georgia and North Carolina, people had had “bounced more checks, complained more to the Federal Trade Commission about lenders and debt collectors, and filed for Chapter 7 bankruptcy protection at a higher rate.”The study concluded that payday loans are better than bounced checks or loans from pawnshops.
Conservatives have been saying that Cordray, who can only be fired for cause, should have been fired long ago.
Cordray is expected to leave the CFPB to run for governor of Ohio.
Meanwhile, he is leaving behind quite a legacy.