The Consumer Financial Protection Bureau (CFPB) recently made public its recommendations for the overhaul of the short term lending industry. It’s one of the strongest attempts to require federal regulation of payday lending, but what does that mean to the people who lean on these loans to get by?
Payday loans make up a $46 billion industry, and that’s a conservative estimate. Millions of people use these loans each year. In reading the proposed rule changes, it seems on the surface to be geared towards regulating the lenders, so it may appear as if there will be no changes for the consumer. This is not the case at all.
The payday loan borrower will be impacted immediately, should these rules be enacted. The effect would be the drastic drop in the availability of these loans. Many people who have used loans before will no longer be allowed to get them. Why? The new regulations are so restrictive they will prevent almost anyone from being allowed to borrow.
The problem with getting a bank loan is the old adage that they will only lend you money if you don’t need it. Payday loan users often don’t have collateral, nor savings, nor credit. They have an income, and they borrow money for short periods of time against that income. If this is taken away, the only option these people will have is going to a bank, which will not give them a loan because they don’t have collateral, or savings, or credit.
How do you protect a child from getting burned? Don’t let them play with matches.
How do you protect a child from falling down? By not letting them stand.
How do you protect people from payday loans? By making sure they can’t get one.
Although all the rule changes are intended to ensure that the lender does not take advantage of the borrower, what they will really do is prevent people from being able to access these loans. Consumers can’t be harmed by payday loans if they are never allowed to get one, right?
Lenders will be required to scrutinize the applicant, dig into their financial history, and exclude anyone who doesn’t meet very strict requirements. They also restrict a lenders ability to collect payments, which by itself will drive most lenders out of business.
And that’s the goal here – to cripple the private loan industry, so they simply won’t be available for consumers any longer. But if this is the endgame, these same consumers should be offered an alternative. The entire reason the payday loan business is so robust is there is a substantial portion of the American populace who are not being taken care of by banks.
So if payday loans are no longer available to the people who banks will not help, where will they turn when they need quick cash? There is no official answer to that, as of yet.