Ross D. Franklin / AP

On Thursday, the Consumer Financial Protection Bureau released a proposal for its rule that will regulate payday lenders at a federal level for the first time. “Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt,” said the Bureau’s director, Richard Cordray. “The harm done to consumers by these business models needs to be addressed.”

The long-awaited rule includes provisions that would require lenders to determine that borrowers can repay their debt by assessing their credit history and means. It would restrict the number of short-term rollover loans borrowers can take in succession to prevent what’s known as a “debt spiral.” It would also require borrowers to be notified when a lender plans to deduct funds from their bank account and rein in a lender’s ability to repeatedly attempt to deduct those funds.

Carmel Martin, an executive vice president at the left-leaning Center for American Progress called the proposal, “a major step toward reining in predatory debt traps that exploit the financial struggles of millions of economically vulnerable Americans.” But unsurprisingly, the organizations that represent the payday industry are critical of the new rule. Dennis Shaul, the chief executive officer of the Community Financial Services Association of America, a payday-lending group, said in a statement, “The CFPB’s proposed rule presents a staggering blow to consumers as it will cut off access to credit for millions of Americans who use small-dollar loans to manage a budget shortfall or unexpected expense.”

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.

Samuel Gilford, a spokesperson for the CFPB, said that the Bureau got rid of the 5 percent payment-to-income ratio after feedback from banks argued that such a cap was too low to make the loans financially sound and feedback from borrowers argued it was too high for the loans to be affordable. In its place they've put a conditional exemption, which they believe provides greater flexibility for underwriting. The Bureau will solicit comment on the payment-to-income approach during the current comment period.

There’s another option that the federal government might consider as a solution, too: postal banking. According to some proponents, using the current postal-service structure would provide the scale necessary to allow the government to support banking for millions of poor and underbanked Americans, with services that could include options such as savings accounts and small-dollar loans.

The CFPB will be collecting comments on its payday lending rule through the fall, and even those who are supportive of the current rule hope that it will become more robust by the time final rules are issued. “While acknowledging the ability-to-pay principle as an important first step, the ultimate goal of the rule should be to prevent consumer harm,” said Michael Calhoun, the president of the Center for Responsible Lending in a statement. “As currently written, the rule contains significant loopholes that leave borrowers at risk.”

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