CEI Expert Warns: CFPB Payday Lending Rule Will Hurt the Poor

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The CFPB is expected to propose a new rule on June 2 restricting so-called payday lending. CEI financial policy expert John Berlau warns that new restrictions, such as requiring lenders to assess a borrower's "ability to repay," will harm the intended beneficiaries of the rule.

The CFPB's rule for restricting small-dollar short-term loans will likely harm many poor and low-income families and stifle beneficial forms of credit far beyond its intended target of payday loans. It's people with marginal credit who can't get credit cards, relying instead on payday loans or similar products, who will be hurt when their car breaks down or some other emergency occurs, leading to a need for immediate cash. Incurring debt may not be the ideal option, but to many it is a better option than not having a car to get to work.

The broad reach of the CFPB’s new 'ability to repay' standard could also stifle innovation from entrepreneurs developing new credit options in the FinTech space. The Credit Union National Association warns that even credit unions' widely praised 'payday loan alternative' product could be restricted by the new rule.

Government should focus on accurate disclosure and lift barriers to saving and financial literacy but leave individuals free to choose credit options that they believe fit their needs.

Related:

CFPB Moves to Cut Off Any Loans to People with Bad Credit