Repair Payday Loans With More Competition
Last week, I wrote about it the devastating impact that the new Consumer Financial Protection Bureau (CFPB) regulation on short-term small dollar lending could have on consumers and businesses. The rule is intended to prevent consumers from “deferring” their loans, ie remaining in debt over a longer period of time.
To sum it up, the rule would be absolutely would devastating for the industry and the vulnerable consumers it serves, and potentially wiping out 75 percent of the 20,000 payday loan businesses across the country. There are approximately 12 million Americans who take advantage of payday loans every year. It is naive to believe that if this legitimate option is gone, they will not be forced into more harmful practices such as defaulting on credit or taking out loans from illegal loan sharks.
Eliminating the already limited choices of vulnerable consumers will do more harm than good. There are multiple surveys This confirms that payday loan users broadly endorse the option. But that’s not to say that payday loans are an ideal form of financing. They are, in fact, costly, risky loans that you would rather not take. But simply regulating them out of existence does not solve this problem. So how can we improve it?
Instead of making a rule that robs consumers of options, we should give them more. A lack of alternative options is what drives most people to payday loans. Increasing competition will lower costs and encourage better industry practices and innovation.
For starters, we could let banks and credit unions back on the market. Two banking regulators, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, imposed strict credit standards during President Obama’s tenure, causing many formal institutions to flee the market.
It’s obvious that they want to get back in. Earlier this year, The Wall Street Journal reported: “Spurred on by the promises of deregulation by the Trump administration, financial companies hope to be able to offer short-term, high-interest loans again after being forced out of the sector by the rules of the Obama era.”
We should let her. By breaking down, rather than erecting, barriers, we can win back established institutions to vigorously compete for the small dollar loan market. This would lead to more competition in a market where financially marginal consumers are constantly looking for the best service. This would undoubtedly help disadvantaged households, who pay billions in fees every year.
It may be too late to convince the CFPB that their soon-to-be-enacted regulation will destroy the very consumers it wants to protect. But it’s not too late for Congress. Congress should use the Congressional Review Act to repeal the ordinance once it is published. But Congress should go further and remove the many regulatory barriers that prevent more competition. The answer to improving short term small loans is more competition.