Payday loans have been the subject of countless articles and news stories in recent months. This additional interest has been fuelled by the announcement of new proposed rules from the American Consumer Financial Protection Bureau (CFPB).
An outline for the proposed rules - which the CFPB claims are to help combat “Payday Debt Traps” - was released this summer and have proven to be very controversial and hit at the core of numerous important issues regarding over-regulation, the remit of the CPPB and, of course, the ethics of payday loans.
What the new rules mean
You can find the outline of the plan for the new rules in this CFPB press release.
For stakeholders in the payday loans industry, the core of the controversy is this: many believe that the CFPB’s claims to be protecting payday customers from debt traps are in fact not their true intention, but rather the CFPB are aiming to completely abolish the industry through over-regulation.
Tim Worstall, a Forbes contributor, clearly outlines the concerns of this group in his article, “The CFPB Is Not Regulating Payday Loans, It Is Abolishing Them”.
The proposed rules would demand that lenders determine whether their customers have the ability to repay the high-cost loans that they take out. In an industry where profit margins are small, the additional labour and loss of business this this additional regulation would bring would essentially spell the end for payday loans.
As Tim Worstall writes: “The economics of a business is what makes a business work. Destroy that economics and you destroy that business.”
This issue brings a number of complex questions into play, such as what the very nature of consumer protection should be.
While some customers do fall into a “debt trap” through improper use of payday loans, many customers use the service as it is intended and rely on the availability of short-term loans of small amounts to make ends meet and function. Many are asking whether it is fair that a service used properly by many could be essentially banned due to the misuse of a minority. The problem is that true, accurate statistics does not exist. You regularly see different 100+ people surveys that assert both positions at the same time.
What’s next for payday loans?
Stakeholders in the payday loans industry, as well as their customers, are waiting for the final regulations to be issued. The deadline for comments on the proposed rules was October 7, and these comments will be considered by the CFPB before the final regulations are issued, which will be created taking those comments into consideration.
If the final regulations do prove to spell the end for payday loans, what will happen to the more than 19 million households in the US that are currently being served by payday lenders? Bethany Mclean looks at this in her article for The Atlantic.
One potential option that many suspect the CFPB are hoping to install is having existing banks and credit unions offer those loans to their customers. This idea has roots in the early 2000’s, and suggests that banks and credit unions could leverage their existing infrastructure and reach to offer this service.
Naturally, this solution has become complicated since the financial crisis, where banks have been required to limit the risks they take in regards to lending and therefore would face complications in offering payday loans.
As you can see, this is a very complicated subject where black and white notions of right and wrong do not exist.
Of course, the Paydoo team will keep you updated on these developments as they come in. We are always interested to hear your thoughts and comments on these issues, and if you would like to speak to a member of the Paydoo team please reach out.
- The CFPB Is Not Regulating Payday Loans: It Is Abolishing Them - Forbes
- Payday Lending: Will Anything Better Replace It? - The Atlantic
- Consumer Financial Protection Bureau Proposes Rule To End Payday Debt Traps - CFPB