When Payday Loans Die, Something Else Is Going to Replace Them

But the regulations will do little to address the other side of the problem: consumers’ demand for small, fast, easy-to-obtain loans. Solving that problem, while ensuring that new predatory loans options don’t pop up, will fall to the financial industry and state legislators—who’ve struggled in the past to protect financially vulnerable Americans.

The new CFPB payday rules focus on payday and auto-title loans that require repayment in less 45 days or less. Among the stipulations, the regulations require lenders making such loans to assess a borrower’s ability to repay (based on factors such as income and housing costs), set limits on how many times a borrower can rollover a loan, and prevent lenders from continually trying to automatically debit from a borrower’s account. Together, the rules will help curb some of the most abusive and dangerous practices when it comes to small, very short-term loans. But what they don’t do is create new or safer products to take their place—nor do they force financial institutions to do so. And that means, that the millions of Americans who use traditional payday loans will now have to turn to other, potentially dubious sources.

Some of those options are already out there, and won’t be covered by the CFPB’s new rule, says Nick Bourke, the director of the consumer-finance program at Pew Charitable Trusts. According to Bourke, many of the same payday and auto-title lenders that will be shelving shorter term loans ahead of the CFPB’s onerous new rules already have other loan options available. And they’re available in about half of all states. “The market has already shifted greatly toward longer loans and there’s a lot of danger ahead because that market is essentially unregulated,” says Bourke. “In some states, like Ohio, lenders can easily shift to high-cost, harmful installment loans. We’re just going to see a lot more of that unless the state lawmakers fix it.”

To prevent that, Bourke says, states could mandate that small and installment loan options include affordable repayment structures, reasonable repayment times, and lower fees. That’s an option that has already been implemented in some states such as Colorado, and one that might work elsewhere.

Dennis Shaul, the CEO of the Community Financial Services Association of America, which lobbies on behalf of small-dollar, payday lenders, is, unsurprisingly, critical of the new rules. which he calls “arbitrary” and “inconsistent.” For example, he argues with the metrics used to determine ability to pay saying that traditional measures are inappropriate for customers who don’t have many of the traditional requirements for credit. And he says that limits placed on number of loans per year won’t actually protect consumers, but instead place arbitrary limits on their ability to get money when they most need it. Shaul says that while he’s theoretically not opposed to a regulation of some kind, he finds this particular rule bad and unnecessarily punitive—for both borrowers and lenders. “One of the things that CFPB doesn’t seem to get is how many people in this country are served by no institution,” Shaul told me. “They’re simply out there with a need for credit, and nothing they can rely on.”

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