Everyone hates payday loans – except for the millions of people who use them. Newsweek reports that the critics of payday loans include consumer advocates, policymakers, law professors and members of the clergy. Even the president of the United States has made disparaging remarks about the industry. So, will payday loans be effectively outlawed? It is possible. If the Consumer Financial Protection Bureau, or CFPB, prevents payday loan lenders from making a profit, they will be forced out of business through regulation.
Is it Legal for the CFPB to Outlaw Payday Loans?
When President Obama signed the Dodd-Frank Wall Street reform bill into law in 2010, the CFPB gained authority over the payday loan industry. Because of this, many short-term loan lenders have been anticipating new federal rules that could outlaw their practice. The Tampa Bay Times reports that to save their livelihoods, some cash loan lenders are threatening to file a lawsuit against the CFPB if the agency’s final regulations cause them to lose business.
A number of lenders are attempting to persuade the CFPB to change its mind about regulating them out of existence. They are doing so by asking their borrowers to send the agency messages confirming that the short-term lending industry is a desired business in their communities.
Amscot, a payday loan lender in Florida, has aggressively pursued this tactic. To simplify the process, the lender offered its customers pre-printed form letters. One letter states, “Without this provider in my community, I know my family will suffer.” Most of the lender’s customers who decided to participate chose to send a form letter. According to reports, 560,000 Amscot customers agreed to send a public comment to the CFPB.
The CFPB’s Proposals are Designed to Ban Debt Traps
NPR reports that Richard Cordray, the CFPB’s director, believes that the payday loan industry is setting Americans up to fail. He said, “The way these products are structured, it’s very difficult to repay the loan, and therefore, people end up borrowing again and again and paying far more in fees and interest than they borrowed in the first place.”
Under the CFPB’s proposed regulations, short-term loan companies like payday and auto title loan lenders would be required to verify that people who request this type of loan can afford it. To make this determination, lenders would have to make sure that borrowers can cover the loan payment and fees as well as their basic living costs and major financial obligations.
Are Payday Loan Fees Justified?
A main complaint that critics of payday loans have is that the lenders of these loans charge too much for their services. A typical storefront lender charges $15 for every $100 that a consumer borrows over a two-week period. This implies that the annual percentage rate, or APR, for the loan is 391 percent, which is an excessively high amount, but is it warranted?
Economists report that the answer to whether or not the cost amount is justified depends on the competition. If lenders face healthy competition, fees will come down on their own. In fact, they should reach levels that barely cover the cost of doing business. In considering the number of payday loan lenders that have brick-and-mortar shops as well as online processing setups, it would seem that they are competitive.
Doing Business in a High-Risk Segment
In addition to competing with other lenders, payday loan lenders also service a high-risk segment of the country’s borrowers. Most people who borrow funds from payday loan lenders have no or poor credit due to payment problems on other loans. This means that payday loan lenders often face the possibility that they won’t be paid for the money that they lend out. When money is lent under the threat that nonpayment is a possibility, borrowers pay more. Since this is true in every financial industry from mortgages to cars, it is curious that the CFPB has its eye on short-term loan lenders.
Will High-Powered Lobbying Efforts Keep Payday Loan Lenders in Play?
Mike Calhoun, the president of the Center for Responsible Lending, said, “The lesson from the last 20 years since this industry started is that it’s been remarkably effective at evading attempts at regulation and using a very high-powered lobbying machine to push for loopholes.” Calhoun confirms that he is in support of the CFPB’s proposed regulations, but he believes that the industry may find a work around. To read more about how payday loan lenders could be forced out of business, visit the Personal Money Store.