The Trump administration has just relaxed payday lending rules. Is this good or bad for borrowers? – InsideSources


Consumer Financial Protection Bureau director Kathy Kraninger waived some underwriting requirements in the bureau’s payday loan rule last week, and consumer advocates disagree whether the results will be good or bad for consumers.

The removed part of the rule requires payday lenders to take out loans to borrowers who get more than six payday loans per year. Lenders should check the borrower’s income and look at the borrower’s other debts and expenses. In other words, they must assess a borrower’s “repayment capacity”.

When drafting the original payday loan rule, the CFPB felt that these underwriting requirements helped keep consumers from falling into the trap of long-term debt. But the Competitive Enterprise Institute (CEI) believes the underwriting requirements do the exact opposite.

Consumers who take out multiple payday loans per year are often faced with very difficult financial situations, wrote political analyst Daniel Press, and getting quick cash loans can help them get back on their feet. A federal cap on the number of loans they can get basically tells consumers how to manage their own finances.

“The proposed new payday loan rule is a crucial solution to a regulation that threatened access to credit for millions of Americans who must cover emergency expenses between paychecks,” Press told InsideSources in an email. “The Bureau’s action today preserves consumer choice and access to credit, allowing individuals – not Washington bureaucrats – to decide what is best for themselves.”

But other consumer advocates say the prospect miss the point of the payday loan rule. The CFPB drafted the rule to prevent predatory payday lenders from trapping consumers in a cycle of debt, which is very lucrative for payday lenders, not to deprive consumers of financial choice.

Because payday lenders offer loans to financially troubled consumers with bad credit, the interest rates on these loans are noticeably high, often above 400%, making them difficult to repay.

“Removing the main protections from this rule is a disservice to the public. With little accountability for their actions, payday lenders have long preyed on communities of color and drained them of their hard-earned savings, ”said Hilary O. Shelton, NAACP Washington office director and vice president Principal of Policy and Advocacy, in an email to InsideSources.

Marisabel Torres, senior policy analyst at UnidosUS, is concerned that the removal of underwriting requirements may encourage some payday lenders to prey on the poor, especially immigrants who may not yet have a stable job.

“Removing the critical repayment capacity provision, as currently proposed, will again open the floodgates for unscrupulous lenders,” she said in an email. “The removal of this critical protection will place working families in a position where they will again be easy targets for those looking to increase their profits without worrying about the devastation they cause to so many Americans who try to reach out to them. both ends.”

Different surveys and studies on payday loans clash. A 2009 study by George Washington University economics professor Gregory Elliehausen, who is currently a member of the Federal Reserve Board of Governors, found that 80 percent of consumers who have obtained payday loans have said they were easy to repay, and only 2 percent said they didn’t like loans because “they made it too difficult to get out of debt.”

According to CEI, “Jennifer Priestley of Kennesaw State University in Georgia found that borrowers with longer loans outstanding had bigger positive changes in credit scores than those with more limited borrowing time.

But polls from the Center for Responsible Lending tell a slightly different story. A CRL Survey 2018 found that “58% of respondents agree with the statement that payday lenders are predatory due to their high interest rate and debt trap model” and “79% of voters support the rule that payday lenders are held accountable ”.

In addition, payday loan debt traps are such a problem for the U.S. military that Congress passed a law limiting loan rates to 36 percent for active-duty military personnel and their families in 2007 (the Military Lending Act).

Advocates on both sides of the debate agree that the biggest problem with payday loans comes down to financial incentives. Rules and regulations can cause payday lenders to charge high interest rates and offer consumers as many loans as possible, but can also cause consumers to act against their own interests.

The IEC emphasizes that payday lenders rely on the repayment capacity of consumers. If the customers of payday lenders go bankrupt, then payday lenders are not making as much money. Some lenders are predatory, but offering payday loans is not inherently predatory. Predatory lenders use hidden charges and confusing terms and conditions and higher than average interest rates – up to 600% – to hurt consumers.

But imposing such high interest rates also decreases the incentive for consumers to repay, as does granting multiple payday loans, which is why CRL wants CFPB to maintain underwriting requirements.

“We urge Director Kraninger to reconsider, as her current plan will keep families trapped in predatory and unaffordable debt,” said Rebecca Borné, senior policy advisor at CRL.

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