New Regulations for Online Payday Loans Will Hurt the Poor, Not Help Them
The sweeping new regulations that the Consumer Financial Protection Bureau has proposed to regulate the payday lending industry could easily hurt poor and disenfranchised consumers more than help them. A report published at Tampabay.com concedes that even the industry’s critics admit that there are few alternatives for online payday loans for most working people who live paycheck-to-paycheck lives.
The Tampa Bay News report suggests that there might be a workable compromise that would satisfy payday lenders, their detractors and consumers who use and support payday lending. Florida regulations–which are perceived as tough but fair–could serve as a model for CFPB regulations on a national scale.
Regulating Online Payday Loans Hurt the Poor by Limiting Their Choices
Many disenfranchised consumers lack the skills, high credit scores, financial knowledge or resources to find loan alternatives. Consumers can also find alternatives to online payday loans even more costly according to a Reason.org report. The story quoted a Consumer Reports study that found APRs for overdraft protection ranged between 608 percent and 791 percent. Moreover, an FDIC report estimated bounced check fees would have effective annual rates between 1,067 percent to 3,520 percent. A payday loan for $100 might have an APR of 391 percent resulting in a $15 fee, but a $100 bounced check might average $56 in fees. Utility disconnections due to nonpayment of a $100 bill could result in $46 late payment and reconnection fees, which generates a 1,203 percent APR.
Florida Regulations Could Serve as Models for the Payday Lending Industry
Tampa Bay Times interviewed 24 payday lenders in its report to find out how people felt about local short-term lending offices, and none of these consumers felt that he or she would be better off without a payday loan option. Florida receives favorable marks for its willingness to compromise to satisfy both payday lenders and borrowers. According to the Tampa Bay Times report, payday loan fees are limited to $10 per $100 borrowed for each 31-day period. Loans also carry a verification fee of $5 that’s only charged once. Borrowers are limited to a $500 cap on loans and can only borrow from one lender at a time. If customers can’t repay a loan, they must inform their lenders and consult a financial counselor. During this time, lenders must grant customers a 60-day grace period when no additional fees accrue to their accounts.
Despite widespread support in Florida and among people who urge that the CFPB adopt these regulations as templates for online payday loans, some consumer groups criticize Florida’s law just as vehemently as they oppose other states’ regulations. Politifact.com reports that 200 consumer groups endorsed a letter to Congress that argued the Florida laws hurt consumers just as badly as those in other states. Pewtrusts.org Senior Researcher Alex Horowitz, after interviewing multiple borrowers, suggested that Florida meets only one of three benchmarks that consumers want from online payday loans: quick approvals, low prices and small installments. Horowitz recommends using Colorado’s laws as templates for online payday loans.
Limiting Choices for Disenfranchised Consumers Could Backfire Against Critics of Online Payday Loans
Most people with low incomes or poor credit scores have few options for obtaining cash in an emergency, and many of these consumers–including people who earn higher incomes–turn to online payday loans to carry them until their next paydays. Used as intended, these short-term loans provide cash for strapped consumers when they most need it.
However, some people will always mishandle credit and accrue late fees, higher interest rates, penalties and other sanctions. It’s impossible to legislate financial responsibility given the demands of everyday life. Reviewjournal.com reports that just half of 1 percent of complaints to the CFPB involve online payday loans and that payday lenders receive high ratings from their customers. More than half of borrowers were “very satisfied” with customer service.
The payday industry’s high interest rates make it an easy target for the CFPB and political opponents, but alternatives to payday lending could be even more expensive. Political compromise is essential in the U.S. system of governmental checks and balances. Ronald Reagan, who negotiated with labor unions as governor of California, commented on the art of compromise according to Freerepublic.com: “If you got seventy-five or eighty percent of what you were asking for, I say, you take it and fight for the rest later, and that’s what I told these radical conservatives who never got used to it.” In cases of criticism of online payday loans, the radicals tend to be liberals or unethical lenders, but many fed-up consumers agree with the sentiment: Find a compromise that everyone can accept. Florida or Colorado could serve as role models for CFPB regulations so that legislation could actually help consumers instead of limiting their choices. Learn more about the proposed regulations for online payday loans at the PersonalMoneyStore.com.