Payday Lending's Long, Strange Trip Through 2016
There is neither a shortage of controversial topics in financial services or financial technology nor a shortage of subjects that tend to polarize people.
But short-term lending — in all its many forms, including payday loans, auto-title loans and some installment loans — is especially good at arousing passion in those who debate it. Arguments about payday loans have a habit of quickly devolving from polarized to outright acrimonious pretty quickly — and 2016 has seen that habit get very, very ingrained.
That is because after almost two years of speculation on the subject, as of early January it was clear that Consumer Financial Protection Bureau (CFPB) was finally going to release proposed new regulations for the entire short-term lending industry. Those regulations dropped in June and essentially boil down to four big changes for short term lenders nationwide:
- Lenders will be required to establish a borrower’s ability to repay.
- Individual loan payments per pay period must be limited to a level that would not cause financial hardship.
- Payday lenders are not to allow consumers to reborrow immediately or carry more than one loan.
- Lenders can attempt to directly debit payments from borrowers’ accounts a limited number of times in the event that there are not sufficient funds to cover the loan payment.
Proponents of new regulation have lamented that the rules didn’t go further but have spent the year arguing passionately that stringent regulation is absolutely necessary because at their worst, payday loans — and other forms of short-term lending — trap consumers in unending cycles of mounting debt though staggeringly high fees and murky loan repayment conditions. These abuses need to be stopped, and cheerleaders for the new regulations note that stringent rules and enforcement are the best way to get there.
Opponents of the regulations argue that rules as written aren’t an attempt to reign in short-term lending, but a regulatory attempt to simply stamp out the vast majority of it by making it too costly and difficult for most short-term lenders to stay in business. Consumers, they argue, aren’t actually well-protected by prohibition, because it means a lot more customers in need of funds won’t be able to access them.
Caught between these two groups are, of course, payday loan customers themselves — a group often speculated upon but rarely actually interviewed and thus often poorly understood. These customers have two equally important needs: not being taken advantage of by unscrupulous lenders and not being completely locked out of the credit markets. Regulation, Dr. David Evans recently noted, has tended to focus nearly entirely on the first side of that equation, with very little thought given to the latter part.
“It is time for a reset,” said Dr. Evans. “Time to recognize the importance of lending for consumers and small businesses and for making the economy go ‘round and ‘round. To recognize the valuable role financial service providers play in making loans for all sorts of reasons, for all kinds of people. And time to put the consumer back into consumer financial protection.”
So how does one get the consumer back into consumer financial protection — and actually hit a reset button?
It’s not a bad idea to understand that custom a bit better and understand how we got here.
Luckily, we have a handy roadmap right here — the PYMNTS PayDay Loan Chronicle 2016. This includes all of the data on all sides of the issue and anything else you might want to read on the road to new regulations.
Spoiler: The situation is more complicated than you’ve heard.
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