Payday Lending: Will Anything Better Replace It?
The practice is slowly being regulated out of existence. But it’s unclear where low-income Americans will find short-term loans instead.
[The May 2016 Issue of The Atlantic includes one of the best and most honest articles on subprime lending I have seen, and I recommend it to you highly. Nearly 100 million of our fellow Americans are not able to participate more than marginally in the regulated banking system so they turn to friends or family or alternative lenders to meet their emergency financial needs. Some worry that the new Consumer Financial Protection Bureau is about to adopt regulations that will effectively shut down the short-term lenders who supply expensive and much needed loans to tens of millions of people. What is the answer to this vexing problem that is one of the most important economic and social issues facing our nation? Interestingly, the author suggests that a possible compromise might be for consumer and industry groups to compromise on a reform along the lines of the Colorado short-term lending law. Some believe that at least a partial answer may be for regulators to take steps to encourage banks and credit unions to work jointly with short-term lenders to address this urgent need. I encourage you to read the Atlantic article.]
Fringe financial services is the label sometimes applied to payday lending and its close cousins, like installment lending and auto-title lending—services that provide quick cash to credit-strapped borrowers. It’s a euphemism, sure, but one that seems to aptly convey the dubiousness of the activity and the location of the customer outside the mainstream of American life.
Perhaps you know all this already—certainly, an assuredly mainstream backlash has been building. Last spring, President Obama weighed in, saying, “While payday loans might seem like easy money, folks often end up trapped in a cycle of debt.” The comedian Sarah Silverman, in a Last Week Tonight With John Oliverskit, put things more directly: “If you’re considering taking out a payday loan, I’d like to tell you about a great alternative. It’s called ‘AnythingElse.’ ” Now the Consumer Financial Protection Bureau, the agency created at the urging of Senator Elizabeth Warren in the wake of the 2008 financial crisis, is trying to set new rules for short-term, small-dollar lenders. Payday lenders say the rules may put them out of business.
The stakes are very high, not just for the lenders, but for the whole “new middle class.” It seems obvious that there must be a far less expensive way of providing credit to the less creditworthy. But once you delve into the question of why rates are so high, you begin to realize that the solution isn’t obvious at all.