CFPB does not regulate payday loans, it abolishes them

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This is not quite what the Bureau of Consumer Financial Protection says, of course, that it intends to abolish payday loans. But that is the practical effect of the new regulations that they intend to publish. It is not immediately obvious that this is a good idea as pointed out by the Federal Reserve. People use payday loans because they perceive payday loans to be valuable to them. Why regulation should be used to prevent people from doing what they want, as long as it doesn’t harm others, is one of those things that no one really explains. But since Senator Elizabeth Warren and others seem to think that people shouldn’t borrow small amounts of money for short periods of time, it seems like people won’t be able to borrow small amounts of money for short periods of time.

The news is that they publish regulations:

The Obama administration will announce on Thursday the first step the federal government has taken to regulate low-cost, high-interest “payday loans”, a $ 38.5 billion market currently left to states.

The crackdown on the payday industry – largely storefront lenders extending credit to 12 million low-income paycheck households – follows a series of actions by President Barack Obama and his aides to cement a shift in the balance of power between consumers and financial institutions during their last year in office.

All of this has to be done by regulation, not by properly considering the issue and drafting a law about it of course:

Under guidelines from the Consumer Financial Protection Bureau – the watchdog agency created as a result of the 2010 banking legislation – lenders will in many cases be required to verify their clients’ incomes and confirm that they can afford to repay the money they borrow. The number of times people could roll over their loans into newer, more expensive loans would be reduced.

The new guidelines do not need congressional or other approval to go into effect, which could happen as early as next year.

The Federal Reserve had something to say on this point:

With the exception of the ten to twelve million people who use them every year, just about everyone hates payday loans. Their detractors are many law professors, consumer advocates, clergy, journalists, policy makers and even the President! But is all the enmity justified? We show that many elements of the criticism of payday loans – their “ineligible” and “spiraling” fees and their “targeting” of minorities – do not stand up to scrutiny and the weight of evidence. Having given up on these bad reasons to oppose payday lenders, we focus on one possible good reason: the tendency of some borrowers to renew their loans repeatedly. The key question here is whether roll-over borrowers are consistently overly optimistic about how quickly they will repay their loan. After reviewing the limited and mixed evidence on this point, we conclude that more research into the causes and consequences of refinancing should be done before any comprehensive payday credit reform.

People who take out payday loans do so because the payday loans benefit those people. Why should they be prevented from doing so? Of course, the CFPB is not saying that it is going to stop it: it is simply saying that there will be regulations. Who can be found here.

And here is the part that tells me that they ban, not just regulate, payday loans.

“The very economics of the payday loan business model depend on a substantial percentage of borrowers unable to repay the loan and borrow over and over again at high interest rates,” said Richard Cordray, director of the consumer agency.

The economy of a business is what makes a business run. Destroy this economy and you destroy this business. And they’re really quite clear in their mind that the economy here depends on re-lending over and over again. So what are these “regulations” then? They have to ban re-lending over and over again.

By their own analysis, they kill the economy of the company: and so they kill the company. As the Federal Reserve points out:

Even though payday loan fees seem competitive, many reformers have called for price caps. The Center for Responsible Lending (CRL), a nonprofit created by a credit union and a staunch enemy of payday lending, has recommended capping annual rates at 36% “to trigger the (debt) trap” “. The CRL is technically correct, but only because a 36% cap completely eliminates payday loans. If payday lenders make normal profits when they charge $ 15 per $ 100 every two weeks, as the evidence suggests, they must surely be losing money at $ 1.38 per $ 100 (equivalent to an APR of 36%.) In fact, Pew Charitable Trusts (p. 20) notes that storefront payday lenders “aren’t found” in states with a 36% cap, and researchers view a 36% cap as a limit. outright ban. With this in mind, the “36 percent” might want to reconsider their position, unless of course their goal is to eliminate payday loans altogether.

Or, as you could say, kill the economy of a business and you kill that business.

The sad part is that there is actually no solution. Publicly traded payday lenders do not make better returns on their capital (the useful measure of “profit” here) than other loan companies. So, in fact, they don’t charge more than the odds for their loans. Of course, these interest rates seem expensive as an APR, but there is a hard truth that needs to be recognized here. Short-term loans of small amounts of money are expensive, so small, short-term loans will be expensive. Goodwill found out some time ago while running them as a nonprofit business:

But alternative payday loans have also drawn criticism from some consumer advocates, who say the programs are too similar to for-profit payday loans, especially when they ask for the principal to be repaid in two weeks. At GoodMoney, for example, borrowers pay $ 9.90 for every $ 100 they borrow, which translates to an annual rate of 252%.

The reason is that there are simply overhead costs associated with granting a loan. Someone somewhere has to look at the documents and make a decision. This human time must be paid for. The cost of this human time will be a smaller portion of a $ 5,000 loan than a $ 100 loan. So, expressed as an interest rate, the cost will be higher for the smaller loan. Given this basic economy, that means making loans cheaper means we should do less analysis of who should get a loan. The CFPB has decided to insist on more analysis: making the loans more expensive to issue. They really don’t help things much there: Unless, as the Fed points out about usury rates, their goal is to shut down the business altogether.

And that is, in my opinion, what they do. The CFPB says the heart of the company’s economy is repeat charges and renewals. They are going to ban this: and so they gut the economy of the company. They are not trying to regulate here, they are trying to ban payday loans.



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