A new report Monday shows many Americans will be negatively effected by new regulations imposed on lending by the Consumer Financial Protection Bureau (CFPB).
The financial area most effected by these new rules is payday lending, according to the Competitive Enterprise Institute (CEI). Payday loans are short-term loans made to individuals through banks, lending businesses, and online stores. They usually carry a high interest rate and require the individual to write a post-dated check for the amount they wish to borrow.
The average payday loan is just $375, and typically range from $100-500. The average maturity on these loans is just two weeks, and interest accrued ranges between $15-100.
Frequently used by consumers who have experienced some sort of exogenous shock, like an emergency or unexpected financial liability, these loans can be the lender of last resort for those who find themselves in a serious pickle. The report estimates that around 12,000,000 Americans received a payday loan in 2015.
“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,” Harry B. Miller, author of the CEI report, tells The Daily Caller News Foundation.
In situations where consumers are in need of quick cash, payday loans can be a much more preferable option to either forgoing necessary goods and services or failing to meet other financial obligations.
Those seeking payday loans tend to be “younger, lower-to middle-income consumers, with incomes averaging about $35,000,” the report says. Payday borrowers are also far more likely to be “female, African American, or both.”
The report notes that the impact of the new CFPB regulations result in nearly a three-fourths revenue reduction in the payday lending industry. The results of that reduction, experts say, will be that many of the some 20,000 payday lending fronts in the U.S. will be rendered unprofitable and will be forced to close up shop.
The CFPB argues that those who use payday loans frequently, or “overusers,” are the problem with the current system. The new rules work to cut off rollovers at two. “Borrowers who have a legitimate need for three rollovers or more need not apply,” the report states.
One interesting thing to keep in mind is that those who have taken advantage of payday loans before (not new users), rather than defaulted on their debt, have drastically low default rates on repaying their payday advances, the report finds.
Finally, the CFPB claims that these new rules will help the majority of Americans in the aggregate.
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.
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