Borrowers Need Better Options than Predatory Payday Loans
After years of hard-fought battles against predatory payday lending at the federal, state and local levels, consumer advocates are looking forward to some landmark victories in 2016. This year, the Consumer Financial Protection Bureau (CFPB) is expected to propose rules governing payday, auto-title and other forms of small-dollar lending. The rules, which have been long-anticipated and much delayed, would establish the first-ever set of broad federal regulations aimed at protecting consumers from an industry whose existence depends on keeping its borrowers in a vicious cycle of long-term debt.
For consumers of these products, which carry an average APR of 300% or higher, the CFPB’s eventual rules will go a long way towards protecting them from lenders who each year strip $9 billion from vulnerable communities—that is, if the rules are strong and do not provide lenders with loopholes to exploit. However, while federal regulations are a much-needed step in the right direction, they are just part of the solution. Demand for these products will remain as long as American households remain cut off from the financial mainstream, meaning they need safe, affordable alternatives to these predatory loan products.
As our brand-new Assets & Opportunity Scorecard shows, nearly half of all American households are living paycheck-to-paycheck, one medical bill or fender bender away from a financial crisis. Moreover, more than half (51%) of the nation's credit users lack the credit scores needed (720+) to borrow money at prime rates, meaning they need somewhere to turn to weather a financial storm. If we are to truly address the fact that one in every five households uses alternative financial services of some kind—such as a payday loan—we need programs that advance workable solutions, and we need to clear away policy barriers that keep those solutions from reaching their full potential.
This is why CFED believes that the role of the government in protecting consumers from predatory lending extends well beyond the CFPB’s forthcoming proposal. In addition, federal, state and local governments should support innovative and affordable small-dollar lending models. The CFPB clearly understands the role alternative lending models can play in this space, as they showed in their March 2015 proposal when they included the National Credit Union Administration’s payday alternative loan product as a model lenders could follow under their eventual regulations.
Now it’s time for the Department of the Treasury, and specifically the Community Development Financial Institutions Fund (CDFI Fund), to expand on the CFPB’s progress by implementing Title XII of the Dodd-Frank Wall Street Reform Act, which aims to improve access to mainstream financial institutions. Title XII would facilitate a whole host of activities to achieve this goal, including allowing CFDIs and other eligible entities the ability to provide small-dollar loans, as well the space to innovate as they develop these critical products. This small provision has the potential to be a major catalyst for creating a small-dollar loan market that would allow mission-driven lenders to compete.
Consumers can’t wait any longer for the CFPB’s rules, and they can’t continue waiting for a demonstrably predatory industry to meet their financial needs. Payday lenders know that there aren’t any incentives in the market to provide a better product, and they’ve shown numerous times that regardless of state or local laws, they will find a way to continue making millions on the backs of hard-working families.
As the CFPB finalizes its proposal, we urge the Department of the Treasury to listen to consumer advocates and leaders in Congress, such as Sen. Sherrod Brown (D-OH), who recently called for the Administration to prioritize funding in FY 2017 for the programs under Title XII and set in motion the necessary steps to have this provision implemented.
In an opportunity economy, there is no room for industries that strip wealth from consumers who are already struggling to get ahead. Consumers deserve a holistic solution for addressing their borrowing needs.
You can help bring this solution to fruition by joining us to tell the CFPB to release strong protections, because #ConsumersCantWait any longer for them to act.