Recently, the Consumer Financial Protection Bureaupublished their outline of proposed rules that they hope to put into place in order to regulate the industry of small dollar lending, which includes title loan shops, installment lenders and payday lending companies. Placing restrictions on financial industries is very much an American institution these days, and there are not many people who oppose lenders being subject to some official scrutiny. However, many people have not taken the time to consider the potentially negative impact that some of the CFPB’s new rules might have on lower income and unbanked people of the United States. In order to make sure that the people who need access to short term, small dollar loans do not lose access to credit, the Consumer Financial Protection Bureau seems dead-set on using every weapon in their arsenal. It is important, though, that the bureau uses their tools to help people make informed borrowing decisions rather than taking access away based upon anecdotal studies.
According to numbers made public by the Federal Deposit Insurance Corporation, about one fourth of United States households are either unbanked or underbanked. Amongst unbanked households, nearly 27 percent take out payday loans, use pawn shops or sign up for rent-to-own agreements. That figure rises sharply to about 40 percent for the underbanked households in this country. For example, in the state of Rhode Island, nearly 20 percent of households fall into the unbanked or underbanked categories, and the unemployment rate continues to rank in higher than the national average.
For quite a while now, the folks who make policies in congress, along with watchdog groups like the Consumer Financial Protection Bureaus, have been over exaggerating the harm to benefit ratio for folks who routinely take out small dollar loans from payday lenders. Of course, by doing so the bureau is looking to find ways to put even more pressure on companies that offer alternative financial services. It seems to be high time that the people in charge take some time to properly understand the underlying economic situations that continue to make payday loans so popular with the unbanked and underbanked people of the United States.
One recent study took a look at over 1 million loans that were made in 2012 and 2013. These loans were given out in 16 states by four different lenders that operate in accordance with the official state laws. The data collected is made up of about 55 percent storefront loans and 45 percent online payday loans.
The findings from this study are eye opening. The study proves that the ratio of payment to borrower income is a very poor method to predict whether or not a loan is going to be paid off. The study also demonstrated that the regulations that impose a cap on the payment to income ratio is probably responsible for reducing consumers’ access to credit, and it does not provide any significant improvement when it comes to improving loan payoff rates. Here’s an example: If a cap were in place that required payment to income ratios of at least 5 percent, that cap would reduce the total volume of credit by 55 to 93 percent. A limit of 10 percent would see credit decrease by 26 to 68 percent, and again, there would be no improvement for loan repayment rates.
The bottom line seems to be that the regulators and potential regulators still don’t seem to recognize the financial impact of their proposed new regulations. To be sure, if payday lenders were to offer more options to their customers, they might help to improve the state of the industry. However, the proposed changes that the CFPB seems intent on imposing certainly don’t provide the kind of options that borrowers really need.
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