ALTERNATIVE FINANCIAL SERVICE PROVIDERS ASSOCIATION

NEWS: May 12, 2015

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The CFPB, Payday Lending And Unintended Consequences
The CFPB has begun to take the first steps toward more intensive legislation of the short term, small dollar borrowing space - also known as payday lending.
Last week, the Federal consumer watchdog announced that it is considering a proposal that would require lenders to take additional steps to ensure consumers have the ability to repay these loans. The proposed rule would also restrict payment collection methods that apply fees "in the excess."
"Today we are taking an important step toward ending the debt traps that plague millions of consumers across the country," CFPB Director Richard Cordray remarked at a Field Hearing on Payday Lending in Richmond, Virginia. "Too many short-term and longer-term loans are made based on a lender's ability to collect and not on a borrower's ability to repay. The proposals we are considering would require lenders to take steps to make sure consumers can pay back their loans. These common sense protections are aimed at ensuring that consumers have access to credit that helps, not harms them."
The announcement has caused a bit of a stir in the days since - though much of the reaction has been positive. The New York Times' editorial board ran with the headline: "Progress on Payday Lending" to lead off their thoughts on the subject, while The Washington Post went with the slightly less laudatory (but still pretty encouraging) "Payday lending is ripe for rules."
"If you lend out money, you have to first make sure that the borrower can afford to pay it back," President Barack Obama told students last Thursday while speaking on behalf of the law. "We don't mind seeing folks make a profit. But if you're making that profit by trapping hard-working Americans into a vicious cycle of debt, then you got to find a new business model, you need to find a new way of doing business."
And indeed it is really hard to rally behind anything called a debt trap - and it is hard to imagine anyone being a strong supporter of seeing hard-working Americans trapped in a vicious cycle of debt.
That said, a holy war on short-term lenders might not be the solution that is actually warranted because it seems possible that the nature of payday lending is not all that well understood, even by highly educated watchers.
For example, in The New York Times' initial report on the proposed rule change, the paper of record defined payday lending as a $46 billion industry that "serves the working poor."
While not an uncommon way to view short-term lending, it might just be a little misleading.
A study by the Division of Research of the Federal Reserve System and Financial Services Research Program at The GWU School of Business found that 80 percent of people who take out short-term loans make more than $25K per year, while 39 percent make more than $40K. Only 18 percent of payday borrowers make less than $25K a year - which is generally what most people picture when they picture the working poor. A salary of $25K- $35K is what most social workers and early career teachers earn - two groups of people that we can all agree are underpaid, but are generally not considered to be "the working poor."
Moreover, a Pew Charitable Trust survey - one that tends to be popular among opponents of short term, small dollar lending because it reports that most "two-week payday loans" are actually paid out over the course of five months, also indicates that income level is not, in fact, the most predictive criteria for whether or not a consumer will use a short-term loan. High income house-renters are far more likely to take out a short-term, small dollar, loan than low-income homeowners; people with some college are more likely to borrow than people with no college or with a college degree; and young people (under the age of 30) overwhelmingly use the service more than their older counterparts - regardless of their income.  

Read entire article...PYMNTS.com 

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