Payday Loan Caps Already Destroying Businesses
Rate caps on payday loan products are already forcing payday lenders and traditional lenders to close shop, which critics suggest would impose great hardships on average families who have low credit scores in the 500s and low 600s. Bigstory.ap.org reports that the regulatory changes proposed by the CFPB could well do more harm than good.
The Consumer Financial Protection Bureau, or CFPB, was created by the Dodd-Frank Act of 2011 to regulate the financial industry in the wake of excesses that led to the mortgage crisis of 2008. Championed by the Obama Administration and Democratic activist Senator Elizabeth Warren, the CFPB was given unprecedented regulatory powers that were independent of Congress and the usual checks and balances of government.
Some consumers are already discovering that rate caps can limit their available sources of credit. Rapidcityjournal.com reports that South Dakota voters approved a law in November of 2016 that capped interest rates at 36 percent. Instead of empowering consumers, the rate caps have forced many payday lenders, auto title lenders and installment loan companies to close their operations. Families who live paycheck-to-paycheck have found that the companies where they could secure short-term loans have gone out of business.
At least two payday chains have closed operations in South Dakota, and similar stories are playing out across the United States. The South Dakota measure that capped interest rates received 76-percent support at the polls, but hard-pressed families are discovering that the measure has limited their options instead of providing any real-world benefits.
The CFPB’s Payday Loan Caps Close Businesses in Many States
Payday loan caps and other underwriting standards imposed by the CFPB will inevitably shrink available credit and credit options for all borrowers and not just those with poor credit rankings. Anticipated increases in the prime lending rate that banks are charged, short-duration loan periods for payday lenders, rate caps and default rates around 20 percent have endangered payday lenders and their abilities to earn reasonable profits.
Payday Loans for Bad Credit
Real payday loans for bad credit, as many borrowers and some supporters suggest, provide an essential lifeline for people who have almost no savings or available credit to carry them through emergency situations. These people might depend on a payday loan to fill their fuel tanks in winter, cover emergency medical bills, pay the mortgage or keep food on the table.
CFPB director Richard Cordray commented, “It’s much like getting into a taxi just to ride across town and finding yourself stuck in a ruinously expensive cross-country journey.” Opponents suggest that this analogy is extreme and doesn’t consider the financial problems that real-world families face. Journalistsresource.org reports on the impact of payday loans as follows:
- Loans can increase or decrease the welfare of families depending on their circumstances, needs, ability to repay their loans and knowledge of financial issues.
- Short-term loans can eliminate stress, penalties, late charges and service disconnections for families experiencing temporary financial distress.
- Rate caps and restricting access to payday loans in Georgia, North Carolina and Oregon failed to appreciably lower default rates and credit delinquencies.
- Payday loans, however, have been found to affect the work performances negatively of active-duty military personnel, so the 2006 Military Lending Act capped short-term loan interest rates at 36 percent.
Reducing Credit Options Is a Risky Way to Empower Consumers
Regulating payday lenders out of business, many experts suggest, is a risky way to protect consumers who don’t want this kind of protection. A good example of this phenomenon is Walmart. The giant chain often drives competitors out of business by undercutting their prices with its bulk-buying power. However, many of these Walmart stores eventually close–especially those in rural areas. Consumers find themselves with no access to essential goods. Rate caps on payday lenders can create the same kind of problems for families with bad credit or no credit.
Bad Credit Payday Loans Draw Mixed Support and Opposition
Bad credit payday loans have drawn political opposition from consumer groups, political activists and liberal Democrats. Groups like Peoplesaction.org have praised the CFPB’s efforts to impose interest rate limits, curtail predatory lending practices and end debt traps that catch about 12 million Americans in debt cycles each year. In fact, the organization calls for even stronger controls, and many politicians and activists support these measures.
The People’s Action Institute is an alliance of several grassroots consumer rights groups including USAction Education Fund, Alliance for a Just Society, National People’s Action, Institute for America’s Future and more than 50 other organizations in 30 states.
Conservatives, Republicans and many business owners, however, view increased regulations as encroachments on states’ rights. Nationalreview.com reports that bad credit payday loans serve as the last option for many families to obtain essential cash. Conservative legislators and their supporters oppose President Obama’s lame-duck efforts to alter the balance of power between consumers, traditional banking interests and payday lenders.
Opponents of increased regulation favor the free enterprise system and its ability to reward and punish those who charge unfair prices and unreasonable interest rates and companies that engage in other predatory practices. Conservative activists feel that payday loan caps discriminate unfairly against legitimate businesses that are only trying to earn a reasonable profit. Payday lenders are forced to charge higher interest rates to cover the high administrative costs of short-term loans for small amounts that don’t earn much interest.
Bad credit payday loans also have higher default rates, so higher interest rates are necessary for lenders to make a profit. Respected analysts from Cato.org quote a study from Pew Charitable Trust that found most payday loan borrowers pay their loans and only stay in debt for five months in the years that they borrow.
Payday loans might seem predatory, but most of these lenders operate as legitimate businesses that serve their customers’ needs. Imposing arbitrary payday loan rate caps and other burdensome regulations might force these companies out of business or change how they operate. For the $38.5-billion-dollar industry that provides payday loans for bad credit, these regulations are targeting a sector of business unfairly and forcing lenders to abandon their core business–providing credit products for disenfranchised and low-income Americans.