The May issue of The Atlantic contains an insightful story titled “The Secret Shame of Middle-Class Americans,” by Neal Gabler. Gabler puts a face to one of the biggest economic issues facing this country: the erosion of household savings in America and the resulting traumatic impact on the middle class. He cites a Federal Reserve survey — released about a year ago — finding that nearly 50% of Americans have trouble finding $400 to pay for an emergency and confesses that he finds himself in this same predicament.
By candidly discussing the financial challenges he faces despite being a successful writer, Gabler highlights the fact that bad credit is pervasive. Numerous studies support this. Last year, the Corporation for Enterprise Development reported that a majority of Americans, 56%, had nonprime credit scores, or scores below 700. The Consumer Financial Protection Bureau, meanwhile, recently found that about 11% of the U.S. adult population was “credit invisible,” or lacking credit scores.
For most people this isn’t due to a lack of education or irresponsible behavior; it’s a result of the economic reality that millions of Americans face today. Fluctuations in income and increasing costs of living, especially in health care and education, are causing more and more Americans to live on the edge.
That is why it is so important that the CFPB’s upcoming rules on short-term lending not create damaging unintended consequences for the millions of Americans who rely on nonbank credit solutions to help manage financial emergencies.
Much has been written about the proposal’s potential to effectively drive short-term payday lenders out of business. Part of why many in the industry view the rules as so onerous is the CFPB’s “ability-to-repay” requirement.
On the surface, the CFPB is proposing something that seems sensible — that lenders should be required to assess their customers’ ability to repay loans. The CFPB’s concern is that improper underwriting of nonprime credit products may harm consumers due to loss of car title or lawsuits against consumers for nonpayment or creation of a cycle of debt.
However, many of the proposed solutions would actually cause consumers more harm.