Last week, I wrote about the devastating impact that the Consumer Financial Protection Bureau’s (CFPB) new regulation on short-term, small-dollar loans could have upon consumers and businesses. The rule looks to prevent consumers from “rolling over” their loans, that is, remaining in debt for an extended period of time.
To recap, the rule would be absolutely devastating to the industry and the vulnerable consumers it serves, potentially wiping out 75 percent of the 20,000 payday loan shops across the country. There are around 12 million Americans who use payday loans each year. It is naive to think that when this legitimate option disappears, that they will not be driven to more harmful practices, like defaulting on loans or borrowing from illegal loan sharks.
Eliminating the already limited choices of vulnerable consumers will do more harm than good. There are multiple surveys confirming that the users of payday loans widely approve of the option. But this isn’t to say that payday loans are an ideal form of financing. They are indeed high-fee, high-risk loans that one would rather not pursue. But simply regulating them out of existence does nothing to solve this problem. So how can we improve them?
Instead of issuing a rule that takes away options from consumers, we should be providing them with more. A lack of alternative choices is what drives most people to payday loans to start with. Increasing competition will drive down costs and foster better industry practices and innovation.
For starters, we could let banks and credit unions back into the market. Two bank regulators, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, imposed tough loan standards during President Obama’s term, leaving many formal institutions to flee the market.
It is evident they want back in. Earlier this year, The Wall Street Journal reported: “Financial firms, spurred by the Trump administration’s promises to deregulate, hope to return to offering short-term, high-interest loans after being pushed out of the sector by Obama-era rules.”
We should let them. By removing barriers, as opposed to erecting them, we can bring back in established institutions to vigorously compete for the small-dollar loan market. This would inject more competition in a market where financially marginal consumers are constantly shopping for the best service. This would undoubtedly help underprivileged households that pay billions of dollars in fees each year.
It may be too late to convince the CFPB its their soon-to-be-finalized rule will devastate the very consumers it intends to protect. But it’s not too late for Congress. Congress should use the Congressional Review Act to overturn the regulation, once it is published. But Congress should also go further and remove the many regulatory barriers that are keeping out more competition. The answer to improving short-term, small-dollar loans is more competition.