The rule is an attempt to address what many regard as an exploitative industry that has arisen to provide that credit. But it doesn’t do much to address the underlying issue. Payday lending is, after all, an ugly and costly symptom of a much larger and more systemic problem—the financial disenfranchisement of America’s poor. It’s estimated that 12 million Americans use payday-loan products, and most of them earn less than $30,000 per year. What will fill in the gap?
The CFPB has tried to keep the need for small-dollar, shorter term loans in mind in the creation of their rule. “We recognize that consumers may need to borrow money to meet unexpected drops in income or unexpected expenses,” Cordray said in his statement. “We recognize too that some lenders serving this market are committed to making loans that consumers can in fact afford to repay.” To that end, the new rule encourages options for longer-term loans that would mirror credit unions’ payday alternatives, such as an interest rate capped at below 30 percent with application fees of only $20.
Still some experts remain unconvinced that the current iteration of the proposal will do enough to ensure the safety of consumers in need of quick cash. “The CFPB’s small-dollar loan proposal misses the mark,” said Nick Bourke, the director of the small-dollar loan project at Pew Charitable Trusts in a statement. Alex Horowitz, the senior officer of Pew’s small-dollar loan project agreed, saying that the longer-term, low interest-rate loans are good, but historically the use of those products is much too small to make a real difference. To be truly effective, he said, regulations would need to accomplish three things for borrowers: lower prices and fees, smaller installment payments, and quicker application processing. The new rules “provide more paperwork for the same 400 percent APR loan,” he says. “That’s not consumer protection.”
But even with an ideal version of payday rules from the CFPB, federal regulation of such products would never be enough. The agency has no authority to regulate interest rates on these products, and they also can’t make a blanket provision that prohibits the use of small-dollar, short-term loans. That leaves the real work up, from a regulatory standpoint, up to state governments—who actually have the ability to set a cap at how much interest financial institutions can charge (or prohibit payday loans altogether).
But the financial-services industry, which could begin to offer small-dollar, short-term loans to its clients, could also play a crucial role. Research has shown that banks and credit unions have the ability to make small-dollar loans that are at least six times cheaper than current payday options. And banks and credit unions are also federally regulated, which can provide an additional level of security and regulation. But Horowitz says that the current version of the payday rules don’t provide enough clarity or incentive for those institutions to do so without fear of running afoul of their own regulators. They also don’t include the industry’s desired provision that would exempt banks and credit unions from certain underwriting procedures if loan terms were between 46 days and six months and less than 5 percent of a borrower’s gross monthly income.