It is no secret that the mainstream media and some government watchdog groups seem to loathe the payday lending industry. If you believed everything that got reported on this industry, you might think that there is no reason for it to be in existence. However, that would fly in the face of the fact that millions (some say 10 to 12 million) of people every year rely on payday loans. The Consumer Financial Protection Bureau recently proposed some rules that they say will help to protect consumers from the potential pitfalls of payday loans. Opponents of payday lending have applauded these new rules, but the elephant in the room is the fact that the new rules may wind up hurting the very consumers that they were supposedly created to protect.
The CFPB has never come out and demanded that the payday lending industry go away completely. But the new rules are based on extensive underwriting for the loans; essentially forcing lenders to do extra leg work to make sure that consumers are able to pay back the loans that they take out. The additional checks and balances that payday lenders will have to go through in order to make loans will likely result in many of them being unable to afford to stay in business.
Some crafty investors are working on their own versions of payday loans to swoop in and snatch up their share of the growing number of people who demand short term, small dollar loans. Uber recently announced that it will allow its drivers to get payday advances of up to $1,000 against their paychecks. The money will be paid back directly from the drivers’ pay checks. And Uber is not the only company that is cooking up new ways to offer services that look a heck of a lot like traditional payday loans.
The CFPB has done what the government is known for doing from time to time. They have stepped in to put new regulations on an industry that is already undergoing massive transformations. And if the CFPB gets its way, the new rules will more than likely limit the options available to poor people. All the while similar financial services and products will become more available to middle class households. It is a reversal of fortunes that should never take place, and one that could have lasting negative impacts on lower income households for decades to come.
The CFPB has come right out and said that the new rules will raise costs for lenders and that they will ultimately lead to a reduction of total loan volume by more than 50 percent. So, the money that would have been lent to lower income consumers (higher risk borrowers) will more than likely end up in the wallets of people who have higher incomes (lower risk borrowers.) Anytime an aspect of lending is regulated the lenders will react by enacting new prices in their loan contracts. They have to account for the increased risk/cost somewhere, right?
They say that bad things tend to roll downhill. The poor in this country know this fact all too well. Unfortunately, it is usually the government who is causing the lack of fortunate financial circumstances that millions of people must contend with. The new rules being proposed by the CFPB are just another example of how a government agency can act on the “behalf” of a group of people and wind up making things even worse on that group of people in the process.