The New York Times recently reported on the potential unintended consequences of the Consumer Financial Protection Bureau's (CFPB) proposed rule governing short-term lending. The article provides the perspective of consumers, businesses and economists who share similar concerns that the Bureau's overbearing rule will harm millions of Americans by eliminating access to regulated short-term credit.
A consumer in Canton, Ohio prefers payday loans over more complicated and costly forms of credit:
He likes the store's neighborhood vibe and friendly staff, and he views payday loans as a way to avoid debt traps he considers more insidious.
"I don't like credit cards," said Mr. Munn, who is wary of the high balances that they make it too easy to run up. "I could borrow from my I.R.A., but the penalties are huge."
Economists, and real world experience, support the claim: consumers will be negatively affected by the rule. Some states have enacted their own payday loan regulations, which ultimately hurt consumers rather than protect them. According to The New York Times:
In 2004, Georgia made most short-term, high-interest loans illegal. Afterward, Georgia residents paid more bounced-check overdraft fees and became more likely to file for bankruptcy, according to a report by the Federal Reserve Bank of New York.
A sweeping study of bans on payday lending, scheduled to be published soon in The Journal of Law and Economics, found similar patterns in other states. When short-term loans disappear, the need that drives demand for them does not; many customers simply shift to other expensive forms of credit like pawn shops, or pay late fees on overdue bills, the study's author's concluded.
The CFPB's proposed rule is a direct threat to consumers' ability to access regulated short-term loans to manage periodic financial difficulty. Unfortunately for these consumers, their need for credit does not disappear once these regulations are in place. Instead, they will either turn to costlier or less regulated options or not be able to meet their financial obligations.
Advance America urges the CFPB to consider the potential harm the proposed rule will have on consumers and short-term credit providers that provide this needed and valued service.