Small, short-term emergency loans to people with poor credit will soon be the taxpayer’s responsibility because it will be the only game in town. It’s a nationalization of the industry.
A new rule will be passed soon that will put most payday lenders out of business and that’s the plan to pave the way for taxpayer-backed small loans to people with poor credit. Once the taxpayer is behind it, the enthusiasm for paying it back or requiring people to pay it back disappears.
Payday loans are small-dollar, high-interest loans used most often by low-income workers to help cover monthly expenses between paychecks. The Consumer Financial Protection Bureau (CFPB) contends the $40 billion industry that serves an estimated 12 million customers each year traps workers in a cycle of debt that is difficult to escape.
Interest rates are extraordinarily high but they are very short term.
The Consumer Financial Services Association of America, the trade group for payday lenders, said a “substantial part of the industry” could be forced out of business. According to a Politico report Wednesday, the CFPB’s own projections show that loan volume could fall by 84 percent under the new rules.
Iain Murray, a vice president at the Competitive Enterprise Institute in Washington, D.C., says the groundwork for a federal takeover of the small-dollar lending industry has been laid over the past few years.
“When all other sources of short term cash are outlawed for people with poor credit, where do they turn? The outcry will become overwhelming for federally backed loans to the underserved market,” Murray said in an email to Watchdog.Along with the expected new regulations from the CFPB, President Barack Obama’s latest budget proposal contains $10 million for the expansion of the federal small-dollar lending program, administered by nonprofits known as community development financial institutions (CDFI).
President Barack Obama has conveniently included a $10 million for the expansion of the federal small-dollar lending program, administered by nonprofits known as community development financial institutions (CDFI).
The CFPB says the crackdown on payday lending will help them escape the “debt trap,” but evidence from states where payday lending has been restricted offers a different narrative.
Watchdog.org reports that North Carolina banned payday loans in 2004 after an intense lobbying effort from progressive groups like the Center for Responsible Lending, which decried the industry as a “debt trap” — the same language now being used by the CFPB as it, at the behest of the CRL, crafts new federal rules.
Three years later, a study from the Federal Reserve of New York found low-income workers in North Carolina were worse off than they had been before the ban. The Fed found higher rates of bankruptcies and bounced checks and found that more borrowers were seeking assistance from CDFIs and other nonprofit lenders.
The Center for Self Help, most influential and one of the largest financial institutions, will be one of the biggest beneficiaries of the ban on payday loans.
They own the Center for Responsible Lending, which acts as its lobbying arm and has a direct conduit to the CFPB.
Last year, emails obtained by Politico revealed that the Center for Responsible Lending spent hours consulting with senior Obama administration officials, giving input on how to implement the rule that would restrict the vast majority of short-term loans.
They wanted support for their own small-dollar loan product with a much lower interest rate as an alternative to payday loans.”
Created in 2010 as part of the Dodd-Frank Act, the CFPB has nearly unchecked regulatory authority over U.S. banks and financial institutions. It’s a progressive dream – a rogue agency without oversight or congressional governance. They have created banks that are too big to fail though they were created to do the opposite.
Nationalizing payday loans will create more problems.
Almost four in 10 Americans say they don’t have enough savings to cover the cost of a $500 emergency, so there is no doubt that payday lending fills a vital role in helping people get by from paycheck to paycheck. But do lenders take advantage of their borrowers?
The Consumer Financial Services Association of America says its research shows 96 percent of customers report payday loans to be useful and 84 percent said it was easy to repay the loans.
Some people do use payday loans irresponsibly and end up trapped in a cycle of debt, but even that minority might be worse off without payday lending as an option. A 2007 paper by Mercatus Center researcher Todd Zywicki suggests that regulators are wrong to look at short-term loans using the same metrics as long-term borrowing like credit cards and mortgages.
“Although expensive, payday loans are less expensive than available alternatives,” wrote Zywicki. “Misguided paternalistic regulation that deprives consumers of access to payday loans would likely force many of them to turn to even more expensive lenders or to do without emergency funds.”
In this case, the regulations will do little to protect consumers’ finances, while driving more people to use the products offered, at taxpayers’ expense, by organizations such as the Self Help Credit Union — just like what happened a decade ago in North Carolina.
“The infrastructure for this — the community development financial institutions — is already in place,” said Murray. “Obamaloans will be the only game in town.”