Earlier this month, the Consumer Financial Protection Bureau (CFPB) unveiled its much-anticipated proposal to federally regulate the payday loan industry. After receiving many complaints about the business model and perusing the numerous studies by non-profit organizations and think tanks alike, the CFPB showcased its proposed rules in Kansas City.
After the rules were released, which included capping the number of payday loans in a short period of time and requiring payday loan stores to conduct income checks, many individuals and groups provided their own two cents. The reaction was pretty mixed.
Pew, which has been a staunch critic of the payday loan industry, has finally provided its own take on the federal consumer watchdog agency’s proposed regulations.
Nick Bourke, the director of the Pew Charitable Trusts’ small-dollar loans project, sat down with the Associated Press over the weekend to offer his insight into what he thinks about the CFPB rules and other matters.
The newswire first asked Bourke about his thoughts on the overall payday loan industry. This prompt Bourke to say that one thing he does constantly notice is that many customers of the short-term, high-interest loan product share one attribute: “income volatile,” which refers to a growing number of United States households that see their incomes go up or down by 25 percent each month. This type of figure is very dangerous to own, especially if you use a payday loan.
“That explains why people do turn to credit like payday loans, to pay bills, stay afloat, etc., and it also explains why so much of the credit on the market is not helping folks,” said Bourke.
“Payday loans, for example, instead of truly helping people bridge gaps, just give them a lump of cash today that only becomes another untenable burden on their finances. It just makes their situation worse.”
With that being said, why does the payday loan industry need to be regulated at the federal level? According to Bourke, there is no federal regulation, which is a troublesome fact because there needs to be “clear and consistent standards across the entire industry,” even if there are state regulations in place for this industry.
In that case, the CFPB’s new proposal is the solution, correct? Not necessarily, says Bourke, who believes a much better solution would be “installment loans that are paid over time.” Since the CFPB did not incorporate this into its proposal, Pew has had mixed feelings about the rules.
Another idea that Pew has put forward is having the banking industry get involved in the small-dollar loan business. This is something that financial institutions have stayed away from, considering how expensive and risky it can be for banks all over the U.S. today. But this shouldn’t be the case anymore because the borrowers are already their clients.
“There will still be plenty of 400 percent annual interest rate installment loans on the market,” he said. “The reason why banks should get into this space is because the borrowers are already their customers. You have to have a checking account to get a payday loan. Banks have diversified set of products, more customers, low cost of funds, etc. that allows them to make loans at a greatly reduced costs compared to a payday loan.”
Despite both Pew and CFPB’s criticisms of the payday loan business, can there ever be a legitimate need for the such an alternative financial product? Bourke explains that credit can be of great help when consumers are facing immense financial difficulty in a short period of time. However, it still needs to be structured as an installment loan as opposed to just two weeks.
He concludes that the average payday loan user earns roughly $30,000 per year, which is reasonable enough. But the issue is that many are “having trouble making ends meet,” and a “payday loan takes too much of a person’s paycheck.”
The CFPB’s new rules are expected to go into effect as early next year since it does not require congressional approval. However, there are some members of Congress who are attempting to block these rules from being approved. With a determined president trying to implement as many regulations as possible before he exits the White House, it’s likely the payday loan rules would pass.