A blog posted on the website of the New York Federal Reserve calls for reframing the debate over short-term lending.
The post – written by three academics and the assistant vice president in the Federal Reserve Bank of New York’s Research and Statistics Group – also calls out the Center for Responsible Lending (CRL), one of the staunchest critics of short term lending, as a “nonprofit created by a credit union.” The conflict of interest is stark; the CRL continually blasts short-term lenders with junk research while carrying the water for a credit union, which competes for customers with short-term lenders. The writers even suggest that the goal of the CRL may be the total elimination of the short-term lending industry.
Read the blog post here at NewYorkFed.org.
Executive vice president at Howard Stirk Holdings, K. Marques Mullings, succinctly sums up how important short-term loans can be for consumers:
As a former banker both pre- and post-housing market meltdown, I have firsthand experience of how much more difficult it has become to be approved for lending. Approvals are not only difficult for the borderline applicants, but also difficult for those with decent cash flow and FICO scores. The increased scrutiny of applicants by the underwriters working for traditional lenders, like banks, essentially locks a large segment of people out, thereby precluding them from obtaining traditional financial assistance.
The concept of supply and demand is one of the most fundamental principles of the free market underpinning the U.S. economy. When there is a void in the market, the free market allows room for businesses to supply the demand. According to the Federal Reserve Board, since the late 90’s, use of payday lenders has risen five-fold to the tune of $50 billion. When banks lock the consumers out, the market will address the need if the demand is high enough. The staggering numbers prove the demand is there and the demand was supplied with payday loan services.
“I consider (payday loans) a right, a right afforded to participants of a free capitalistic society,” Mullings continues. Read more at Washington Times.
For all the Consumer Financial Protection Bureau’s (CFPB) villainization of the short-term lending industry, you’d think their complaint database would be chock full of angry consumers. It’s not. Commentator Dan Horowitz calls it the CFPB’s “inconvenient truth”:
“Consumer complaints are the CFPB’s compass and play a central role in everything we do. They help us identify and prioritize problems for potential action,” CFPB Director Richard Cordray said in a press release announcing the new public database.
The only problem? The database shows complaints about “payday lenders,” which are currently in Cordray’s cross hairs, composed less than one percent of all complaints, far outnumbered by mortgage (36 percent), debt collection (17 percent), credit reporting (15 percent) and other categories. Payday lending complaints were one of every 152 complaints the bureau received, 55 times less frequent than mortgage complaints.
Read more at TownHall.com.
Richard W. Rahn’s recent editorial in the Washington Times points out the dangers to our economy should the Consumer Financial Protection Bureau (CFPB) pass its proposed rules on short-term lending.
“On Sept. 29, Congress held a hearing on the rules proposed by the Consumer Financial Protection Bureau (CFPB) that would likely destroy much of the small-dollar loan industry and drive many low-income and poor credit-risk people into the arms of loan sharks. The CFPB rules are so costly that most lenders will likely go out of business — by government intent. The small-dollar loan industry has been criticized for charging high fees and engaging in aggressive collection practices. The problem is that it is expensive to lend money to poor credit-risk people, and if legitimate businesses are not allowed to make a reasonable profit because of government regulation, the black marketeers will be the only ones serving the poor. As Rep. Jeb Henslaring, chairman of the House Financial Services Committee, noted to CFPB Director Richard Cordray: ‘These are the very loans many need to keep their utilities from being cut off suddenly or keep their car on the road so they can, in turn, keep their jobs.’ Mr. Cordray had no answer as to how the poor will obtain necessary low-dollar loans once he has destroyed the legitimate lenders.”
Read more at the Washington Times.
Oppose the short-term lending rules being considered by the CFPB. These rules will limit our access to payday and other short-term loans and take away our financial freedom. Some of the rules would limit our ability to borrow money to 90 days a year and force us to wait 60 days between loans. This doesn’t work for us. If the rules become law, many of us will have no credit. The rules won’t apply to other forms of credit, so why are we being unfairly targeted? How we manage our money is our responsibility-not the federal government’s. We use these loans responsibly. Payday and other short-term loans are legal under state law and work for us. Regulation that makes it nearly impossible for us to obtain or to qualify for a small loan is the same as eliminating these loans.
Consumer satisfaction with short term loans continues to rise, according to a new federal report.
The Consumer Financial Protection Bureau’s (CFPB) Monthly Complaint Report showed a 12 percent decrease in the number of short term loan complaints from consumers from this summer compared to the summer of 2014, according to The Hill, a Washington-based news outlet.
“The report reaffirms what the industry has long known,” Dennis Shaul, CEO of the Consumer Financial Services Association (CFSA), told The Hill. “Consumers value payday loans as a high-quality source of credit during times of needs.”
In the story, Shaul said the report once again exposes the CFPB’s plan to saddle the short term lending industry with more federal regulations as “misguided.”
“The truth is banning payday lending does nothing to address the needs of consumers,” Shaul said. “Rather, it simply eliminates a responsible credit option and forces consumers to turn to inferior alternatives, including dangerous, illegally-operating lenders.”
Recently, the CFPB proposed “rules that would end payday debt traps by requiring lenders to take steps to make sure consumers can repay their loans.”
“What the rules actually would end is the availability of much-needed credit for millions of Americans,” says Andrew F. Quinlan, the cofounder and president of the Center for Freedom and Prosperity, in a recent editorial.
The rules, Quinlan believes, could cause more harm than good.
“Borrowers who rely on payday loans don’t generally have access to alternatives. Where others might cover an unexpected expense by using a credit card, for instance, they are forced to take out small, short loans to get to their next paycheck. This is because their financial history or income makes them too risky for traditional banks.
“The CFPB wants to protect such borrowers from digging themselves into an even deeper financial hole, but in so doing it will further restrict credit to the very people who may need it most to pay bills, visit the doctor, or repair a car needed to get to work. Even CFPB’s own analysis acknowledges that between 60 percent and 80 percent of the small-dollar loan market could be eliminated, which would force many to turn to even less desirable options.”
“It’s not fun living paycheck to paycheck,” Quinlan writes. “Millions of Americans struggle with that reality daily. The last thing they need is a nanny government pretending that it is to their benefit to have their already limited options restricted even further.”
Read more at Philly.com.
Critics of short-term lending often rally around a call to cap consumer loan interest rates at 36 percent. But in a recent post on the American Banker website, two scholars show why interest rate caps don’t work and aren’t financially feasible.
Thomas M. Miller Jr., a finance professor at Mississippi State University and a visiting scholar with the Mercatus Center George Mason University, and Chad Reese, assistant director of outreach for financial policy at Mercatus, write that “regulations limiting interest rates are the latest in a long series of misguided legislation and regulations that limit or deny access to important consumer credit products. Interest rate caps, like other price controls, have severe unintended consequences.”
In their column Miller and Reese addressed new regulations recently announced by the Obama administration that would expand the Military Lending Act of 2006, which caps some short term loans to military personnel at 36 percent. OCLA members don’t make loans to military personnel. But consumer groups and others have called for 36 percent interest rate caps on all consumer loans, including those made by OCLA members to millions of Ohioans, so the arguments made in the column easily translate to concerns over rate caps on other types of consumer loans.
“Is a 36 percent annual interest rate for a small-dollar loan too high?” Miller and Reese wrote. “Those who say ‘yes’ likely have a worldview shaped by large-dollar home mortgages or auto loans. But people need to borrow money for many reasons. Millions of Americans rely on nonbank-supplied small-dollar loans to meet wide-ranging credit demands like durable goods purchases or for unexpected automobile repairs.”
“With or without (short term lenders),” the scholars wrote, “the demand for short-term credit will still exist.”
To learn more about how capping interest rates on small term loans is bad policy and not feasible, read the entire article at:
New data from the Federal Reserve shows that 47 percent of Americans “can’t pay for an unexpected $400 expense through savings or credit cards, without selling something or borrowing money, according to the Federal Reserve.” That’s a big segment of the population.
Per Politifact: “Respondents indicate that they simply could not cover the expense (14 percent); would sell something (10 percent); or would rely on one or more means of borrowing to pay for at least part of the expense, including paying with a credit card that they pay off over time (18 percent), borrowing from friends or family (13 percent), or using a payday loan (2 percent).”
Should new CFPB rules limit access to short-term consumer loans, they could dry up credit for a large swath of the population. Please read more at Politifact.com.
Jeffrey H. Joseph, a professor at the School of Business at George Washington University, recently penned an article for The Detroit News pointing out major concerns with proposed payday lending rules from the Consumer Financial Protection Bureau (CFPB).
“One of the biggest myths about payday loans is that they’re much more expensive for consumers than other financial products,” Mr. Joseph writes. “Yet they are less expensive than fees incurred from bouncing checks or overdrawing their bank accounts and credit card late fees with high interest rates—products not being targeted as aggressively by the CFPB. Consumers also report they are well aware of the cost of their payday loan and interest rates are largely displayed at lending centers. …
“The CFPB’s quest to eliminate payday loans and other short-term lending options will leave low-income Americans with few legal options to turn to when an emergency expense arises. That’s hardly providing ‘financial protection’ to the Americans who need it most. Let’s hope these needy families have something they can sell the next time their car breaks down.”
Read the full article here.