In its effort to regulate short-term credit products, the CFPB is picking winners and losers in the marketplace. The CFPB’s proposed rule will limit competition, close businesses, put employees in unemployment lines and reduces options for consumers with short-term credit needs.
If the CFPB has its way, consumers will lose several important and popular options for managing financial challenges.
Millions of Americans live paycheck-to-paycheck, and according to the Federal Reserve’s latest study, half of all Americans cannot find $400 for an emergency. For these individuals, short-term credit services are often the best option they have to make ends meet.
The vast majority of consumers who use payday loans do so responsibly and make informed choices about their personal financial circumstances. According to a recent survey, 96% of borrowers say that they understood how long it would take to pay off their loan and how much it would cost them.
In the world proposed by the CFPB, consumers will be forced to turn to more expensive alternatives or have no options for credit for periodic or unexpected expenses – all because the CFPB has decided they shouldn’t have access to a form of credit they value and rely on.
The CFPB’s proposed rule sets requirements that no small operator can meet, threatening to destroy small businesses, cost jobs and hurt communities.
A recent report found that the CFPB’s proposed rule will reduce payday loan revenues of small lenders by 82%, with five out of six lenders experiencing a dramatic drop. Losses like these would force most small and many larger lenders to close their doors, leaving the owners without a livelihood, employees without jobs and customers with fewer placers to turn when they need credit.
Thirty-five states have examined the need for short-term credit, debated and ultimately developed laws and regulations that balance consumer protection and equitable access to credit.
Under the CFPB’s proposed rule, these state laws will be undermined and stripped away. The consumer will be handed a maze of conflicting and confusing regulations that serves no one well. States will lose the ability to protect their residents because their existing, effective payday lending laws will be preempted and consumers will return to the days where they had no choice but to default, bounce a check or turn to truly horrific choices.
The CFPB’s top-down approach eliminates customer choice and undermine the progress made for citizens when their state lawmakers made these options available for their consumers.
Today, consumers can carefully weigh their credit options and choose the one that makes the most sense for their financial situation. If the CFPB successfully eliminates short-term credit, consumers in need of credit will be forced to turn to higher cost options like bank overdrafts.
The winner? The big banks. These fees make huge sums of money for banks. In fact, the U.S. banking industry is on pace to collect more than $10 billion in fees this year alone. Not only do banks rake in money from overdraft protection fees, but the CFPB to date hasn’t even tried to rein them in.
Illegal, unlicensed and unregulated lenders operate in the shadows, and will inevitably prosper wherever regulated payday lending is restricted or banned.
The fact of the matter is that demand for short-term credit products is very real and, unfortunately, consumers in need of credit will be at a higher risk of fraud and identity theft if regulated lenders are driven out of the market.
Americans' credit card debt is skyrocketing, with the average balance at over $7200. Fees from this type of debt make huge sums of money for banks, particularly as more American’s are forced into high interest rate cards.
Payday loans provide competitive pressure to keep fees lower and provide an alternative to maxing out high-interest cards. Without options, consumers will once again have fewer and less desirable options.