Proposed Payday Lending Rule Will Hurt Lower-Income Consumers

The Consumer Financial Protection Bureau is a federal agency created by the Dodd-Frank Wall Street Reform and Consumer Protection Act to protect consumers from “unfair, deceptive, or abusive practices” by financial institutions. On June 2, 2016, the CFPB proposed federal regulations for the short-term loan industry.

These nonbank financial services have been utilized by an estimated 5.5 percent of the population in the past 5 years, or 12 million Americans annually, to help cover unexpected expenses. The payday loan industry, valued at $46 billion, employs over 50,000 Americans.

The proposed rule includes penalty-fee prevention provisions; 30-day waiting periods between loans; loan renewal limits; and the collection and reporting of information on ability-to-repay to a centralized database. Critics say it would decrease access to credit and the supply of loanable funds for low-income individuals and those with bad credit histories. They also claim it will encourage consolidation of the payday industry, further increasing the cost of borrowing. The rule would reduce the volume of payday loans by 84 percent, according to the Community Financial Services Association. Indeed, the CFPB says that reducing the volume of loans and number of lenders — that is, market consolidation — is one of the goals of the regulation.

Regulation of the so-called payday loan industry was a state responsibility prior to the Dodd-Frank Act, and states adopted a variety of laws ranging from outright bans to permissive rules. While the proposed federal regulations would provide uniformity, are they in the best interest of the consumer? After public comment, the CFPB expects to issue the final rule in 2017.

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