Unfortunately, the holiday season isn’t bright and merry for a lot of Americans. This is a time of financial struggle, when they have to find out the best way of putting gifts under the Christmas tree, while still paying for all the everyday expenses. It can certainly seem very difficult to meet both the ends. Sadly, the CFPB or the Consumer Financial Protection Bureau is about to come out with new regulations that could make the holiday season far worse for many families going through tough financial times.
Not everybody is in the banking system. In fact, according to estimates, about one in every four American homes carries out financial transactions outside what we call the mainstream banking system. Without having a savings account or checking account, they are not able to get credit cards and traditional loans among others. So their financial options are largely limited when they need some extra cash. These are your “under-banked” Americans.
To benefit from the low prices just before the holiday sales, many of them will turn to payday or such other short-term loans. They often use this money for their emergency car repairs and to meet other financial expenses before the next payday.
The Cost of Issuing a Payday Loan
It has often been said that the payday loan providers charge a steep interest rate. There is certainly a cost, like any other loan from any other provider. However we need to take a step back and think for a moment – is the payday loan cost for a consumer actually too much, when you consider the cost for the lender who is issuing the loan?
The fact is that, there are significant financial risks for a lender who is issuing the payday loan. The money is provided to people who often don’t have the credit standing that qualifies them for other financial options that are less expensive. Because of this, there is no option for the payday lenders, but to charge a somewhat higher fees and interest rate, because they must cover their risks.
Agreed in terms of APR (Annual Percentage Rates) the loans may look like high rate loans, but in terms of money the consumer pays a few dollars fee on hundred dollars. This is not something most are unable to pay.
The FDIC came out with a paper recently titled, “Payday Lending: Do the Costs Justify the Price“? This paper concluded by stating the following:
“We find that fixed operating costs and loan loss rates do justify a large part of the high APRs charged on payday advance loans”.
So you see, even the FDIC agrees these higher fees and rates. And not just this single paper, many other studies too have revealed the same findings.
No Negative Effect on Credit Score
Many studies have also shown that payday loans do not really have a negative effect on the credit scores of borrowers. Actually, research has revealed that with these short-term loans the borrowers can avoid bouncing a check, and thereby avoid the high costs associated with them. And of course, the borrowers can pay their bills on time with the money they get from such loans. In fact, if anything, a payday loan can actually help borrowers improve their credit score. If you can pay back on time, and show that you are able to meet your financial commitments, then your credit score is bound to improve.
However, in spite of all these obvious benefits, it is surprising that the activist groups and some law makers are pushing the CFPB to impose stricter regulations on the activities of payday lending agencies. We don’t think that’s the right decision.
Truth About the Activists – The CRL
CRL or the Center for Responsible Lending is one agency that is leading the charge for tighter regulations on the payday loan industry. This group was set up by Herb and Marion Sandler. CRL says that their mission is to prevent what they call is “abusive lending practices”.
However, did you know that the Sandler’s made their money by issuing adjustable rate mortgages where the payments every month used to go up steeply by thousands of dollars? These sub-prime and adjustable mortgages naturally caused massive defaults. This issue has been highlighted several times in “60 Minutes”, “The New York Times” and by others. In fact, it is often said that this was one of the contributing factors that eventually caused the financial crisis of 2008.
So shouldn’t we take what the CRL is saying with a pinch of salt?
The Center for Responsible Lending says they want a cap on the annual interest rate charged by the payday lenders at 36%. In truth, if this cap is put into effect, then this would be the end of payday lending, much like what has happened in all those states where this 36% cap has been brought into force.
Looking Deeper to Reveal the Truth
Let us look deeper now into why exactly the Center for Responsible Lending wants the elimination of payday lending.
The fact is that, the CRL might have a financial interest in asking for these unjust interest caps on payday loans. Self Help is the parent organization of CRL, and it is a fact that the Union too offers short-term loans. A report published in the POLITICO recently shows the exchange of emails between the CFPB and the CRL. In these emails, the CRL was seen “pushing CFPB to support its own small-dollar loan product with a much lower interest rate as an alternative to payday loans”.
This is shocking. The founders of CRL offered junk loans to consumers who clearly couldn’t afford them, causing massive defaults and bankruptcies, while they were silently minting money. This was one major contributor for the Great Recession and the housing crisis. And now the same CRL is showing compassion for the public and wants to prevent defaults. They are now asking lobbyists to limit short-term lending under the disguise of preventing “abusive lending practices”. Their real interest, it seems, is to remove the competition so that CRL’s parent organization the Self Help can once again peddle their own short-term loan plans.
Sometime soon, in the next few months, the CFPB is going to come out with their final version of the rules. The market is saying that the interest rate payday lending companies can charge is going to be limited. Plus, the companies will also have to make sure that the borrowers have the means to make the repayments. It has been said that many payday loan companies will go out of business once these rules are brought into effect.
That is precisely what the Self Help and CRL wants. This will surely benefit them. But this is going to seriously hurt the 12 million Americans who take a payday loan every year. Unable to access the conventional banks and payday loans, many of them are bound to turn to options that are less regulated, like loan sharks and pawn shops. Unable to pay their bills on time, they will have to file for bankruptcy. Or they must forego their Christmas presents altogether. Do you want this to happen? Do you want your neighbor to go hungry during the holiday season?
American families don’t deserve these CFPB regulations.
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