This past spring, the Consumer Financial Protection Bureau (CFPB) unveiled its much-anticipated proposal that would impose new federal rules and regulations for the payday loan industry. This regulatory framework at the federal level is meant to complement state and local laws.
Officials at the federal consumer watchdog agency say that payday loans need to be reined in because they are harming and impacting the most vulnerable consumers with endless debt traps.
Despite the concerns that the likes of CFPB director Richard Cordray and Massachusetts Democratic Senator Elizabeth Warren may have about the impecunious, a new report has found that payday loans are more popular than ever. In fact, the number of consumers taking out a payday loans has surged 30 percent. This means that 24 million Americans will borrow some type of payday loan this year.
At the same time, millions of Americans will be negatively affected by the new CFPB regulations. And the two demographics that will be mostly hurt are blacks and women, says the Competitive Enterprise Institute (CEI), which published a detailed report pertaining to payday loans in the United States.
According to the CEI, many consumers lack a rainy day or emergency fund. And when an unforeseen event unfolds, like a broken down car or a badly damaged refrigerator, then they will not have the funds.
Simply put: payday loan lenders are the last resort for a large number of borrowers and without them thousands could fall into dire straits.
“Federal regulators want more restrictions on payday loans, but that will hurt people who urgently need a short term loan but lack rainy-day savings or credit cards,” said Harry B. Miller, author of the CEI report, in an interview with the Daily Caller.
The CFPB has regularly defended its plan by arguing that it prevents consumers from overusing payday loans. The new rules, says the CFPB, are meant to limit rollovers and those who have multiple payday loans at the same time. This has been one of the biggest concerns for the CFPB and others, such as consumer advocacy groups, local and state governments and non-profit organizations.
The news outlet responded to this scenario by referring to the free market and a voluntary exchange:
“The net-effect of barring consumers from interacting with payday lenders more than a few times, is that it interferes with free market interaction between a buy and a seller. If an American family needs an emergency roof replacement, or a child breaks a leg, or the lights are shut off, they should be able to enter into an agreement with an accredited lending institution willing to take on the risk.”
Despite this line of reasoning, opponents purport that payday loans come with high interest rates, early repayment fees and other surreptitious charges that resort individuals entering into an endless debt cycle. This is the reason why so many North American and European jurisdictions are either placing limits on payday loans or are prohibiting them altogether, even if it means the rent isn’t paid or the lights are shut off.
It is expected that U.S. President Barack Obama will approve of the CFPB’s regulatory framework, though opposition from a number of Congressmen is growing, who say it should be delayed by two years.