Our friends at Reason TV have a fascinating new video out on the ethics and politics of short-term financial services like payday lending and check cashing. Host Todd Krainin interviews Prof. Lisa Servon of the University of Pennsylvania about her recent book The Unbanking of America: How the New Middle Class Survives.
Servon took a sabbatical from her teaching gig to work as a clerk in the South Bronx and Oakland, and learned that the payday lenders and check cashers are serving real needs in low-income communities, rather than exploiting then as many activists and consumer advocates allege.
That’s consistent with research CEI has published, in particular Hilary Miller’s paper from 2016, “Ending Payday Lending Would Harm Consumers.” Miller writes:
Payday loans are most frequently used by constrained consumers who have few or no liquid assets and limited opportunities to borrow on credit cards or from other mainstream lenders. The proceeds are generally applied to expenses that are either unexpected or cannot be postponed. Since many borrowers live from paycheck to paycheck and have very little discretionary income, even small interruptions in income, or unexpected expenses, may cause hardships and financial emergencies. Payday loans thus provide an opportunity for consumers to smooth income or consumption under circumstances where their rainy-day savings may be near zero and where other forms of credit are already fully utilized or unavailable.
In multiple surveys, consumers overwhelmingly reported being satisfied with their payday borrowing experiences.
Last year, the Consumer Financial Protection Bureau began writing a rule that would severely restrict the ability of short-term loan providers to do business. If it proceeds on schedule, those restrictions will become effective in 2018, when, according to Dallas-based D magazine, “compliance costs will wipe out 70-plus percent of all businesses that extend short-term debt to consumers.”
CEI’s Iain Murray and John Berlau submitted comments on the proposed CFPB rule in October 2016, laying out three strong criticisms:
- The rule will have a much broader effect in discouraging other financial service providers – including credit unions, community banks, and non-profit lenders – from providing short-term credit to lower-income consumers.
- The new “ability-to-repay” standard is a bad one for evaluating short-term unsecured loans. Barring poor people from getting loans for which they may not have the “ability to repay” means that those denied credit will then lack the ability to pay for basic goods and services. Thus, the rules reinforce an existing cycle of poverty.
- The proposed rule will adversely affect the market for voluntary protection products (VPPs). VPPs form an important and valuable part of the auto loan market, providing peace of mind to car buyers. VPPs include products like credit insurance as a form of debt protection against unforeseen events, such as unemployment or illness, in order to keep vehicle payments and other such contracts up to date. They are generally sold alongside and bundled with vehicle financing. The prime purpose is that of insurance. Because they are bundled in with vehicle financing, their fees and monthly costs can easily drive a loan’s effective APR above the 36 percent “all-in APR” floor for regulation under the proposed rule. Because the regulation of loans above 36 percent all-in APR is onerous, we can expect auto dealers to stop offering these products to their customers.
Read the full comments here.