Maybe it’s time to admit daddy knew best.
After talking to both sides about the payday loan rules battle, I can’t help but go back to my father’s regulatory regime. Two words dictated his approach to managing his finances: “Pay cash”.
No one, not even the Consumer Financial Protection Bureau, will put in place such a simple rule. It would never represent a national mandate. But it could definitely help you do the math when deciding whether you need to stretch a few more months on an old TV, a bunch of cars, or not-so-great tires. Then do you think about how much you would borrow for a longer term loan? Reassess if you would attend private college or cut costs by going to community college for a year or two and then heading to state university?
Yes, this is the old school. And money only seems too simplistic, especially when people who have taken out payday loans say they felt so stressed that they had no other options. But when I was a kid, I watched my dad bring a wad of cash to a store when he bought new furniture and appliances. I’ve also seen him fix a ton of things – including watching him fix a tire – to stretch his dollar.
And frankly, paying with cash is a way out of credit card fiascos for many consumers. If you don’t have money on hand, or you know you need money for a big bill, you just aren’t buying some things. Or you shop until you find something cheaper.
The reality is that no one should ever choose to borrow money from a loan shark, even if the shark is swimming under the guise of a trade association or financial institution. But it is estimated that over 12 million people take out payday loans in a year, loans of $ 300 or $ 500 which can have an annual percentage rate of 391%. About 16,000 lenders operate storefronts in shopping malls and others, as well as online.
Perry Green, 30, said he ended up spending $ 1,000 on fees and interest after taking out a $ 300 payday loan at a storefront in Detroit. Green, who now lives in Chicago and spoke last week at a press conference led by activist group Michigan United, said his first loan had turned into a three debt trap. years after continuing to take out one loan after another to cover bills and fees. He took out the loan to cover his rent because he thought it was his only option.
Payback time from predatory payday lending practices
Dennis Shaul, chief executive of the Community Financial Services Association of America, the business group of payday lenders, has strongly criticized proposed restrictions on payday loans released last week by the Consumer Financial Protection Bureau. He claims it would bankrupt people and cut credit to the most vulnerable consumers who don’t have many credit options.
Nothing is easier, he says, than offering new protections to consumers by saying that most people can no longer get credit, which he claims is what the CFPB is essentially trying to do. .
Of course, Shaul also argues that consumers could ultimately find riskier credit – if payday lenders are forced into bankruptcy by the new federal rules – by turning even more frequently to illegal offshore lenders and other sharks. more dangerous.
The American Bankers Association, which represents large and small banks, also found fault with the rules proposed by the CFPB.
The CFPB proposal, along with previous regulatory measures, would make it “difficult for banks to meet the needs of the roughly 50 million consumers who access a variety of small dollar bank and non-bank lending products each year,” said the ABA in a press release. his statement.
While the CFPB has frequently expressed interest in expanding the role of banks in the small dollar lending market, the ABA has said the proposal does not do so significantly and will significantly limit the availability of small dollar credit.
Will Google’s decision to ban payday loan ads be the end of those loans?
Some might have liked the CFPB to simply crack down on triple-digit rates and sky-high fees charged by short-term, low-cost lenders. But federal regulators do not have the power to set interest rates. Individual states can decide whether they want to limit the fees and rates on payday loans and other low-cost loan products.
“States can and should keep and adopt new cap rates as the first line of defense against predatory lending,” said Tom Feltner, director of financial services for the Consumer Federation of America.
The Pew Charitable Trusts, which have researched small loan amounts, have an interactive online map describing what states are doing in the payday loan regulatory space.
In Michigan, for example, 5% of the state’s population uses payday loans. According to Pew’s research, Michigan is classified as a permissive state, meaning the state has interest rates that allow payday loans to exist in the state. Pew notes that the annual percentage rate typically exceeds 300% for Michigan borrowers.
“The real power of CFPB to drive down prices is to bring lower-cost suppliers, like banks and credit unions, to the market,” said Alex Horowitz, senior manager of the low-cost loan project at Pew.
Pew researchers support the inclusion of a proposal requiring that long-term loan repayments be no more than 5% of a borrower’s income. Pew said the 5% payment option, which was in the CFPB’s 2015 proposal, would provide the product safety standards banks need to offer low-value loans at prices six times lower than those payday lenders.
Considering all the powers that have financial interests and opinions on low dollar loans, we’ll likely hear more as the plan is open for public comment until September 14. Consumer advocates, such as Michigan United, are urging consumers to voice their complaints. on payday loans with the CFPB.
Yet don’t bet on someone who charges only cash purchases – or for that matter, who completes eliminating the debt traps. It just isn’t that simple. Where is it?
Contact Susan Tompor: [email protected] or 313-222-8876. Follow her on Twitter @Tompor.