Editorial: Don't prevent poor from getting loans
The Consumer Financial Protection Bureau is considering reopening a rule that would force small-dollar lenders to determine whether their customers can pay back short-term loans. This would restrict access to capital for millions of Americans, including the half million Michigan residents who rely on these loans.
"The rule reinforces the institutional bias in our banking systems against non-prime rated consumers," says Mary Jackson, CEO of the Online Lenders Alliance, a trade group of fintech companies. "As the rule stands, it likely will do more harm to the very populations it strives to protect by setting special standards for those individuals when they attempt to access credit."
Democratic presidential hopefuls Sen. Elizabeth Warren, D-Massachusetts, and Bernie Sanders, D- Vermont, deride payday lending because interest rates on these loans can be over 100 percent. And 80 percent of payday loans are taken out within two weeks of a previous payday loan.
Many call these loans predatory, but for low-income Americans access to payday loans is often essential for dealing with emergencies. For people who don’t have good credit or who don’t use banking services at all, these loans pay for unexpected expenses like hospital bills, car repairs or home upkeep.
But because borrowers do not post any collateral on these loans, they are high risk for lenders and have accordingly high interest rates.
The loans are advances against a future paycheck, usually between $100 and $500. Borrowers usually owe around $15 in interest per $100 borrowed for two weeks.
If borrowers let their loan accrue interest beyond two weeks, they could quickly rack up a large debt.
Payday loans are “typically used by consumers who are living paycheck to paycheck, have little to no access to other credit products, and seek funds to meet recurring or one-time expenses,” according to the CFPB.
Greater accessibility to loans like these would cause interest rates to fall due to increased competition. It’s already happening.
In 2017, another CFPB rule opened the door for banks and credit unions to offer small installment loans at reasonable prices.
A payday borrower accumulates $350 in fees on a $400 loan in just over three months. But at U.S. Bank, under its new “Simple Loan” program, a loan offered to a similar customer costs just $48 in fees, though borrowers must already be members of the bank.
Interest rates will fall if there is more competition over short-term, small dollar lending.
If the government continues to place onerous restrictions on short-term lending, however, the poor will have little access to fast cash when they need it most.