Curbing Payday Loans
The feds are taking aim at the $46 bil lion payday loan industry, said Jessica Silver-Greenberg in The New York Times. The Consumer Financial Protection Bureau will soon launch a “major initiative” that would require payday lenders to tighten their lending standards and restrict how many times a high-cost loan could be rolled over. Some 12 mil lion Americans turn to payday loans each year, paying interest rates that sometimes exceed 300 per cent. Though states have long tried to stamp out the industry’s worst practices, this will be the first time a federal regulator “is entering the fray.” At the heart of the new rules will be a requirement that “lenders assess whether borrowers can repay loans” at the end of the typical two-week lending period, “by examining their income, other debts, and their payment history.” Enforcing that rule, regulators hope, will “sharply reduce the number of unaffordable loans that lenders can make.”
Payday lenders aren’t taking these proposals sitting down, said Alan Zibel in The Wall Street Journal. They argue they provide an important service to low-income and poor-credit consumers, and that the new rules will leave cash-strapped Americans with no other borrowing options in emergencies, causing them “to miss bill payments; use overdraft programs or turn to dangerous, illegally operating lenders.” Give me a break, said Danny Vinik in NewRepublic .com. These “lenders advertise the loans as a short-term fix,” but their business model relies on keeping borrowers in debt as long as possible. The average borrower takes out a $375 two-week loan for a fee of $55, according to research by the Pew Charitable Trust. If a borrower can’t repay after two weeks, he gets dinged with another $55 fee. Do that for a year, and he’ll end up paying $1,430 in fees, for “an APR of 381 percent.” Short-term borrowers would be better off with a bank, which sometimes offer similar “deposit advance loans” that are less riddled with fees.
The CFPB should take care crafting its rules, because these “lenders are a slippery bunch,” said Jeff Guo in Washington Post.com. Regulating them is a bit like playing Whac-A-Mole. When state lawmakers have tried to curb excesses in the past, companies have “disguised themselves as other kinds of lenders”; bucked loan caps by splitting their loans into smaller, simultaneous debts; and even exploited tribal sovereignty laws to run payday businesses from Native American land. As the CFPB “mulls its strategy,” the agency should keep a single fact in mind: “The business of lending to the low-income is too lucrative for companies to give up without a fight.”
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