An air of uncertainly loomed over the short-term lending industry, especially payday loan as it became clear that the CFPB was going to finally release their proposed list of regulations for the short-term lending industry as a whole. The regulations brought about some real changes – strict analysis of borrower’s ability to repay loans, individual loan payments per day must be limited to a level that did not cause any financial trouble, lenders need to allow borrowers to reborrow instantly and in the event that there is insufficient funds to repay the loan, lenders can make an attempt to directly debit payments from the accounts of the borrowers.
The new regulations did not go further.
Supporters of the regulations argue that the rules are only an attempt to protect the consumers from getting caught in the debt trap. Critics, however, are of the opinion that it restricts the customers’ access to credit and funds. Caught in between both the groups is payday lending consumers.
Who is a typical payday loan borrower?
As per the Pew Charitable trusts, typical payday lending customers are white women between the ages 25 and 44. Payday lending providers helps millions of Americans find a quick solution to their financial bind. It offers them access to credit and they can use that money to take care of their pressing needs before the next paycheck.
In the absence of short-term lending, where will the customers go?
It is difficult for high-risk customers to obtain loan from traditional financial institutions. There is often pressure on banks and other large financial organizations to wiggle their way out of having to offer any kind of loan to risky borrowers. Even though Richard Cordray, director of CFPB, thinks that small banks and credit unions will be able to offer loans at reasonable rates, it is not entirely true. The high rate of defaulters often makes these agencies pull the plug on offering loans. To them, short-term lending is unprofitable and too risky.
Some supporters of CFPB even suggested that Post Officers can act as short-term, low-cost lenders. However, there are strong arguments against Post Offices functioning as banks. This is because it has never been the purpose of the Post Office. So, consumers practically have nowhere to go if the payday lending industry is forced out of business.
Some options for payday lenders to consider
There are innovators who offer software solutions that can help payday lenders to tie into their POS and verify the borrowers’ status, amount, loan term and interest rare as per the state usury laws. This technology exists in 16 states and in such states, there is no abuse of the system.
Alternatives to payday lending have been dreamed of, such as Cumulus launched in 2016 at the Innovation Project. But, nobody knows how these solutions are going to function in the brand new regulatory system.
One thing is for sure that payday day lending is a very simple issue, but it does not have a simple solution. This is because lending to a class of borrowers with a history of not repaying loans is not easy. So, it is no feasible to offer them short-term loan at low rates of interest.
The payday lending industry heavyweights are of the opinion that destroying small-dollar loans would cause millions of Americans a lot of problem. They might not even be able to manage their day-to-day expenses. Payday loan is something that a lot of Americans depend on. In a utopian world, it would have been easy to give our small-term loans at very low interest, but it is not realistic.
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