Federal regulations on payday lending are set to kick in nationwide later this year. When they do, a lot will change for the 12 million Americans who use them each year.
Opponents of any federal rules for the industry have long exploited that uncertainty to try to derail the Consumer Financial Protection Bureau’s efforts to curb payday lending’s most abusive business practices. If the anti-regulators are to be believed, the rules will flat-out kill the industry — leaving 12 million vulnerable people with no legitimate source of credit to make ends meet.
Industry Cassandras conjure images of rampant loan-sharking throughout the poorest pockets of the United States. But that fearmongering has never made sense.
The Consumer Financial Protection Bureau’s (CFPB) proposed rules were explicitly tailored to allow for-profit payday and auto title lending to continue. The rules will shrink the industry’s wide profit margins and end its pattern of drawing billions of dollars each year out of the relative minority of customers who get trapped in repeat borrowing cycles. But they are no headshot to the business — and indeed, should some lenders decide the new rules don’t let them make enough money, the firms that remain active will have a chance to absorb that market slack and earn more money.
Now comes news that traditional brick-and-mortar banks are eager to jump back into the market once the rules are finalized. And they have a specific product in mind to help the millions of people who currently turn to payday loans — one they will only offer if the agency’s regulations go through as expected.
At least three major American banks are planning to offer comparable loans at far lower cost once the rules are finalized, the American Banker reports. The banks would only discuss their plans anonymously, but the business model they sketched out to the trade paper illustrates the potential power of the rules — and the weakness of the most common arguments against them.
Still Room To Profit From Poverty
Anything that leaves millions of people to rely on high-cost short-term loans to cover their living expenses is suboptimal from a progressive policy perspective, of course. Truly big ideas to lift payday loan customers into economic security would require ambitious wealth redistribution or utopian ideas like a universal basic income. And moderate alternatives like postal banking or greater investment in non-profit community financial organizations would also reduce borrowing costs while recycling revenues into public uses rather than private profit.
But absent the political will to go big on economic security, millions of struggling families will continue to need some version of what storefront payday lenders currently offer. And getting old-school depository institutions back into that market segment to serve that demand could be a major positive step, based upon the plans these banks are quietly circulating.
The new products would only launch if the CFPB’s rules go into effect as expected, because they rely upon one of the two separate regulatory tracks the agency proposes. Rather than two-week payday loans with fixed fee structures, the banks propose longer-term loans where borrowers never owe more than 5 percent of their gross income in any given month.
That would mean a monthly pricetag of about $125 a month for a hypothetical borrower earning $30,000 a year, or roughly one sixth what such a borrower would likely pay under the business practices that the CFPB’s opponents are trying to protect. The banks would expect to net just $70 per month on the loan product they are contemplating, according to the American Banker — and even lower profit for borrowers below that income level.
That’s exactly the kind of severe dropoff in revenue CFPB opponents insist would kill the industry. But it’s a good enough return to entice major banks back into the field.
“I think banks can make a return on it. It is not going to be significant, but it is really beneficial for the community, it is beneficial for so many consumers and I think if banks handle it correctly they can make a positive return,” one of the bank executives told the trade publication.
Desperate And Deceptive
Such enthusiasm for providing a public service at a slender profit puts the lie to the alarmist reaction to the CFPB rules. Libertarians accuse the agency of trying to kill the industry and harm the poor. The industry itself warns of a mass exodus from the market. In Congress, similar smears about the agency’s proposal are now bipartisan — despite overwhelming statistical evidence to contradict one of their favorite talking points — and lawmakers use backroom hearings to try to kill equivalent protections even for military families.
If the agency were really setting out to kill the industry, it would have simply instituted a hard cap on interest rates nationwide. Its two-track regulation is explicitly designed to allow continued for-profit lending of this sort, while shrinking profit margins and curbing the industry’s worst abuses.
The prospect of banks re-entering this market also illustrates the public value of the modest regulatory curbs the agency has designed.
Banks’ previous small-dollar credit offerings, in the form of deposit advance loans, ended up being nearly as harmful for consumers as payday loans from a storefront shop. When banks abandoned deposit-advance products amid scrutiny from the Federal Deposit Insurance Corporation and other regulators, many more low-income customers were pushed into the arms of storefront lenders.
Those lenders knowingly rely on the minority of borrowers who fall into a “debt trap” reborrowing cycle to capture the vast majority of their profits — which measure in the billions of dollars annually today. And payday lenders who operate online rather than from storefronts can be even more abusive, often flouting state law in the relatively few jurisdictions that have tried to make payday lending less harmful.
House GOP Wants To Stop The Pentagon From Protecting Military Families From Financial PredatorsEconomy by CREDIT: AP PHOTO/PATRICK SEMANSKY Military families will be exposed to predatory car loans and payday…thinkprogress.orgIf the CFPB rules only succeeded in chasing the most unscrupulous actors out of the industry, that would probably still be a good outcome. But it would also mean these products are somewhat harder to get than they are today. At the margin, some families who need such a loan to cover their bills for the month could conceivably be harmed.
It’s tough to predict exactly how the financial industry will respond to the new rules. But for every lender that decides to quit the game because modest profits aren’t good enough, there will be others who see a chance to expand their market share on the still-profitable form of the loans that the agency’s anti-gouging rules promote.
It is good news that some of the same banks who fled this market a few years back are now feeling drawn back into it, not because they see a high-profit loophole in the rules but because the rules create an opportunity for steady, modest returns.
Business gravitating to the 5 percent payment cap in this way “could save millions of borrowers billions of dollars” each year, Pew Charitable Trusts small-dollar credit expert Nick Bourke told the Banker.