A Competitive Enterprise Institute report released today warns that many Americans will be hurt, not helped, by new restrictions on lending imposed by the federal Consumer Financial Protection Bureau (CFPB).
“Federal regulators want more restrictions on payday loans, but that will hurt people who urgently need a short term loan and lack rainy-day savings or credit cards,” said Hilary B. Miller, an expert on payday lending and author of the CEI report The Consumer Benefits of Payday Lending: Consumer Financial Protection Bureau’s Proposed Rule Threatens Access to Credit for Those Who Most Need It.
“People sometimes face emergency or unexpected financial shortfalls that cost much more than the finance charge of a payday loan, such as cut-off utilities, a repossessed car, late fees, missed work time, or eviction,” Miller explained. “Payday loans give people a chance to prevent real hardships.”
Payday lending is already highly regulated by states, through usury limits, maximum loan amounts, and proscribed collection practices, and is subject to existing federal laws covering consumer credit. But the proposed CFPB restrictions, such as requiring that lenders first assess a borrower’s “ability to repay” and cutting off the number of loans and loan rollovers a borrower can take on annually, will effectively preclude nearly all payday loans.
The CEI report explains that government regulators have shown no evidence that payday lending is harmful or that limits on re-borrowing will improve consumer welfare. But if regulators shut off access to payday loans, borrowers will be forced to seek inferior loan substitutes that carry substantial bank overdraft fees or late charges; and some people may even turn to illegal loan sharks.
Payday loans are unsecured short-term loans typically made at storefronts and online. An estimated 12,000,000 Americans have taken a payday loan in the last year. The borrowers tend to be disproportionately young and lower- and middle-income, with incomes averaging about $35,000.
The average loan amount is $375, but usually ranges from $100 to $500. The average initial time set for payback is two weeks, or the borrower’s next payday, but borrowers often choose to extend the due date. Fees charged for these loans average about $15 per $100 loaned for two weeks, although fees as low as $10 and as high as $30 per $100 are not uncommon.
Hilary B. Miller is chairman of Consumer Credit Research Foundation and an attorney and statistician. He has over 25 years of experience in the consumer credit industry.