Payday loans survive – WSJ
Borrowing of small dollars declined in the last quarter as Americans were stuck at home, but demand could swell soon as many workers adjust to reduced hours or wages. They will have that option thanks to the final rule released Tuesday by the Consumer Financial Protection Bureau on payday loans.
The new rule replaces a draft by Obama-era director Richard Cordray, who allegedly required lenders to apply a strict standard for assessing creditworthiness. The bureau found that the proposed rule would have reduced the volume of payday loans by at least 62%, leading to the bankruptcy of thousands of storefront lenders. Indeed, the review will preserve the status quo, leaving the regulation of payday loans to the states.
This will be good news for millions of people: Americans took out $ 90 billion in short-term loans in 2018. Critics focus on the “debt spiral” that traps some borrowers who do not repay in both weeks. But the weight of evidence – including a 2012 study by Ronald Mann of Columbia Law School, cited in both versions of the CFPB rule – shows that most borrowers understand the risks.
The need for quick credit is greater than many realize. Like credit card operators, the more than 12,000 payday lenders nationwide set fees at a level that allows them to maintain the pattern for all customers. The volume of payday loans has fallen by almost 40% since 2007, mainly due to the tightening of monthly interest rate caps by states. But consumers continue to show up where the law allows.
Perhaps more than any other agency outside of the intelligence community, the CFPB has been a scene of struggle between Trump’s appointees and permanent staff. A memo from an outgoing office economist that leaked in April described how mid-level workers fought to prevent management from rewriting the pay rule. These critics allege that director Kathleen Kraninger and her predecessor, Acting Director Mick Mulvaney, rushed the process and ignored the industry’s harm analysis.
Yet the new final rule retains the economic research the bureau produced under Mr. Cordray. It also preserves tighter limits on how lenders can collect repayment. In revising the rule, Kraninger simply explains that consumers would suffer more from the elimination of loan companies than from the fees. She has the final say on the rules.
Progressives will undoubtedly take this fight to court. But the 2017 provisions to restrict lenders never came into effect, so even a sympathetic judge should have a hard time deciding that the rewrite is hurting consumers. Meanwhile, millions of Americans will be able to get the money they need in the short term.
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Published in the print edition of July 8, 2020 under the name ‘.’