In a move started by Donald Trump in February of 2020, the Consumer Financial Protection Bureau finalized the decision in July 2020 to roll back payday loan regulations. The new rule reverses one written under the Obama administration that would have required lenders to look at someone’s income and other monthly payments — like rent, child support, or student debt — before giving them a loan. The payday lending industry lobbied hard against those regulations, and under the Trump administration, they never went into effect. Now, the CFPB has officially rolled them back.
The current director of the CFPB, Kathleen Kraninger, said that rolling back the regulations would “ensure that consumers have access to credit from a competitive marketplace.” The payday lending industry group Community Financial Services Association of America, which lobbied against the 2017 rule, said something similar in a written statement: “The CFPB’s decision to issue a revised final rule will benefit millions of American consumers. The CFPB’s action will ensure that essential credit continues to flow to communities and consumers across the country.”
Some short-term loans “can work for a consumer, if it’s created in a way that ensures that they have the ability to repay, it doesn’t make their financial outlook worse,” said Rob Levy of the Financial Health Network.
Payday loans may not be suitable for everyone, but they help millions of people bridge a gap during hard times. For example, a recent Federal Reserve survey found that 40 percent of American adults do not have enough savings to cover a $400 emergency expense.
For those on the financial fringe who lack savings or access to credit, paying a past-due utility bill or fixing a broken-down car can be tough. Small-dollar loans can get those vulnerable consumers through to their next paycheck, and they beat having the electricity shut off or being stranded without a car.
So what was the CFPB’s justification for the near-elimination of a valued industry? The Obama-era CFPB said that “consumers lack the requisite level of understanding” of these loans. That is, consumers are incapable of grasping the risks of short-term, high-interest loans.
To support that claim, the CFPB relied on a study from Columbia Law School professor Ronald Mann. The problem is that Mann’s study showed a majority of consumers do appreciate the risks of short-term, small-dollar loans, and rationally decide to take them out anyway, concluding that the majority of borrowers “have a good understanding of their own use of the product.”
Professor Mann even went so far as to criticize the original rule in a letter to the bureau, stating that it was “frustrating” that the CFPB’s summary of his work was “so inaccurate and misleading,” torturing the analysis to the extent that it was “unrecognizable.”
Despite the CFPB’s claims, the fact is that small-dollar loan products are remarkably simple. So long as a borrower has an income, a checking account, and an ID, a short-term loan can provide between $100-500 for a 15 percent fee, with no required collateral and no hidden fees or terms.
For example, a customer could take out a loan for $300 and owe $345 in two weeks' time. It’s that straightforward. No payday lender that is abiding by long-established law is doing anything more complicated. This is perhaps why a mere 1 percent of all complaints received by the CFPB are related to payday lending. In fact, the overwhelming majority of small-dollar loan borrowers value them.
MoneyThumb's PDF financial file converters are used by many payday lenders to make quicker and more informed lending decisions. This ruling by the CFPB is a big win for those lenders as well as consumers.
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