Cash Advance Industry Faces New Scrutiny from the CFPB
In June 2016, the Consumer Financial Protection Bureau (CFPB) proposed a multitude of severe lending regulations characterized as consumer protection from payday debt traps. Citing investigative data, the CFPB steadfastly argued that cash advance and payday loans lead to consumers becoming debt-ridden and that their proposed statutes would serve to protect consumers from the so-called predatory clutches of lenders.
Cash Advance Industry Customers
Over 12 million American adults utilize online and store-front cash advance or payday loans annually. On average, a borrower takes out eight loans of $375 each per year and spends $520 on interest. A study conducted by pewtrusts.org found that “5 percent of American adults” report having used a payday loan in the past five years.” Pew’s study also determined that while borrowing tends to be concentrated among younger and lower to moderate income individuals, “people of most ages and incomes use payday loans.”
Cash advance borrowing and payday loans have been an integral part of American society for decades. Men and women of all socioeconomic classes and ages have taken advantage of the quick and convenient access to cash when their own finances are tight, and emergency cash is required to make ends meet.
For the chronic borrower with unsustainable income, these types of loans could feasibly be construed as debt traps. However, for the millions of responsible borrowers who fully understand the interest rates involved, the penalties that are accrued, and the obligations that go with their borrowed money, a cash advance can prove to be a lifesaving source of income that is available any time of the year.
The New CFPB Rules that Could Spell the Demise of the Cash Advance Industry
The new regulations that the CFPB has been implementing have far-reaching implications on nearly all aspects of the cash advance industry. The CFPB has already executed limits on how frequently borrowers can obtain cash, the frequency on how those borrowers roll older loans over into new loans, and strict limitations on how cash advance lenders can withdraw money from the bank accounts of borrowers.
Among the most stringent and important rules being put into place by the CFPB is a regulation that would require all lenders to undergo extensive predetermination criteria that would ascertain a borrower’s ability to pay back their loans successfully. This same regulation would also suspend repetitive debit attempts that both escalate fees and further a borrower’s difficulty in climbing out of debt
At this current time, cash advance loans are faltering. Many borrowers are simply shuttering their services and going out of business. With the continued ongoing constraints by the CFPB put upon the cash advance industry, many within the business contend that there is a very feasible possibility of the eradication and complete destruction of the cash advance industry as we know it.
A Post-Apocalyptic World Without Cash Advance Loans
The CFPB has been on a mission to serve and save the consumers for years now. While their mission is an honorable one, it is a mission fraught with complications. It’s hard not to pose the question of what happens to the cash-strapped person, the person with the low credit score, or the person in dire need of a short-term and small-dollar loan?
Those people with low credit scores or who happen to be strapped for cash or are looking for small-dollar loans will be hard pressed to find any kind of assistance at a bank or obtaining any kind of secured credit card. It is due to that very specific kind of difficulty that people have turned to cash advance loans for decades as a source of help and assistance in dire times when there is no other form of help available. With the demise of the cash advance industry, borrowers will have to resort to questionable and possibly unsafe ways in securing emergency funds.
Should the Federal Government Regulate Cash Advance Loans?
The CFPB fully intends to enact consumer protection to the best of its ability, but the reality is that is slowly destroying the cash advance industry with a litany of rules and regulations that make it impossible for borrowers to remain profitable. The destruction of the cash advance industry inevitably means the eventual removal of a viable financial product that has been in existence for years, utilized by consumers who are already limited in their financial options.
Taking the option of cash advance loans away from borrowers is essentially removing their consumer power to borrow as they see fit. Consequently, the role of CFPB can be construed as interventionist as well as anti-capitalist, with consequential effects on both cash advance industry and the legions of borrowers who sustain the industry.
The CPFB is arguably misguided in its collective belief that cash advance lenders are predatory companies pursuing the poor and coercing them into debt traps. One must ask important questions to get the full scope of the matter at hand:
- Are lenders genuinely at fault?
- Is it predatory to lend to someone in dire need of money?
- Should cash advances be abolished across the board due to the unfortunate experiences of a few borrowers?
- Might there be a better solution, rather than strictly regulating the cash advance industry into extinction?
In contemplating the above questions, it is of considerable interest to note that Ronald Mann, a professor at Columbia Law School, and his study of over 1000 cash advance users. The borrowers in the study were questioned when they expected to pay off their loan in its entirety. Interestingly, the majority answered honestly and accurately and were thus able to pay within a period of time when they did come out of debt.
Directly contradicting the viewpoint of the CFPB that borrowers are seemingly duped into debt traps via cash advance agreements, Mann’s study shows us that by and large, borrowers are fully aware of how long it will take them to pay back the entirety of their loans and that borrowers aren’t being forced or coerced into anything. Rather, borrowers are merely taking advantage of a financial product that is readily available for them to help them survive in times of duress and dire financial need.
Cash Advance Loans Awareness
While the regulations put into place by the CFPB are a step in the right direction towards protecting consumers, it falls short in terms of its many downfalls and negative attributes. Quite simply, a well-functioning society cannot exist without the presence of a viable financial option for those people who are lower income, cash-strapped, and have poor credit scores.
Unable to receive help from banks and credit card companies, these people often have nowhere to turn except for the financial assistance offered by cash advance loans. Used responsibly, these loans can prove to be life-saving and serve to benefit entire families, or as an option for anyone who needs them.
Providing awareness is the best thing a cash advance company can do for its borrowers. Explain to borrowers fully the implications of borrowing, the full scope of the terms involved, and highlight the ramifications and interest rates that accrue with missed and late payments.
Ensuring that borrowers comprehensively understand the cash advance process will lead them to make the best decision and the most informed decision possible, and as such, the both the borrower and the lender will go on to have a consensual, clearly understood, and wholly pleasant transaction.
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