by Barry A. Liebling
Suppose you are a low income person. You have a job, but little – if any – savings. You have an unexpected financial crisis. For example, your car breaks down, and you need to repair it to get to work. How do you pay to get your car fixed?
You could ask your family or your friends for a short-term loan. They may or may not be able to help you, but in either case you are likely to be embarrassed by the request. You cannot get a bank loan because your credit rating does not meet the strict standards banks require. Of course, every community has loan sharks – who will loan you money for extremely high fees and may use violence against you if you do not pay up on time.
And then there are payday lenders. These institutions are not banks, and they specialize in making short-term loans to low income people who have emergency expenses. The fee is higher than what a bank would charge, but that is academic since banks are not likely to assist you. If all goes well you borrow the money, get your car running again, and eliminate your debt when you get your next paycheck.
What can go wrong with payday lenders? Some people develop an unhealthy payday lender habit and borrow many times (perhaps too many times) during the year. They might accumulate a lot of debt as they go from one lending institution to another in an unsuccessful attempt to get themselves out of a hole. Most payday lenders have limits as to how much they will loan to a customer in a given amount of time. When people get into trouble with payday lenders there are two prominent causes. In some cases the lending company is behaving dishonestly – is materially misrepresenting the terms of the agreement and taking advantage of a customer’s lack of knowledge. Note well that any company (in the lending business or otherwise) that engages in fraud – deliberate deception – is in the wrong and should be stopped by the force of government.
Alternatively, a customer may be at fault when he or she gets in trouble by taking on too much debt. This is exactly parallel to situations where people get into trouble by eating too much food, drinking too much alcohol, spending too much on fancy clothing, or taking lavish vacations that they cannot afford. Contrary to leftist doctrine, people are generally responsible for their own decisions and actions – and ought to be held accountable.
In summary, payday lenders provide a valuable service. They make short-term small loans available to people who judge these loans to be a better deal than their available alternatives. Most important, payday lenders permit people to rescue themselves from uncomfortable situations without having to rely on the government. Like any ongoing business payday lenders have clients who like the services they obtain as well customers who are unhappy with their experience.
The Consumer Financial Protection Bureau (CFPB), a federal agency partially created by the efforts of Senator Elizabeth Warren, is intent on putting payday lenders out of business – or at least making it as difficult as possible for them to stay in business. Earlier this year it proposed a set of rules – the text runs more than 1,200 pages – that will turn up the punishment quotient for both payday lending companies and for consumers who want to do business with them.
According to The Wall Street Journal the CFPB document “imposes a complex set of requirements on the payday industry, mandating that lenders assess a borrower’s ability to repay and making it harder for lenders to roll over loans – a practice that often leads to escalating borrowing fees – or to take fees out of a borrower’s bank account.” Before the rules officially go into effect interested parties can send their comments to the CFPB for review. Apparently, there has been an enormous deluge of comments on the proposal – which are split between busybody leftist activists who want to “prevent lenders from … trapping borrowers” and members of the payday loan industry in concert with their satisfied customers. http://www.wsj.com/articles/dueling-payday-lending-campaigns-deluge-cfpb-with-comments-1476131725?mod=djem_jiewr_BE_domainid
Consider the significance of this ongoing conflict.
If the rules go into effect the cost of being in the payday lending business will dramatically increase. Some companies will be able to adjust to the requirements, while others will give up and enter other businesses where they can function more freely. The net result for the payday lender industry will be fewer firms, which means less competition for the remaining players, which means fewer incentives to be pleasant to customers.
From the payday lender customer perspective this is not advantageous. A customer who fails to prove (according to deliberately onerous CFPB standards) that he or she can pay back the loan will have to rely on family, friends, or menacing loan sharks. Of course, to the delight of leftist ideologues, the potential customer might abandon efforts to be autonomous and seek some sort of government-controlled-and-directed welfare.
Zealots for the new rules describe themselves as looking out for the interests of vulnerable citizens. But the proposed regulations will put low income people in a worse position. Leftist partisans who are intent on crippling the payday lender industry argue that customers are not savvy, not sophisticated, and are generally not competent to make decisions that can have such a negative effect on their lives. But the argument that citizens are not equipped to make decisions competently is a double-edged sword. If people do not have the ability to evaluate the pros and cons of using a payday lender – why would they be able to judge whether or not they should accept welfare payments or food stamps (officially the Supplemental Nutrition Assistance Program – SNAP). Do government cheerleaders really want to talk about people being “trapped” into a bad deal? Of course, defenders of the welfare state will say that tax-funded social programs are noble because they aim for the “common good” instead of profits. If you think that makes any sense please notice how prosperous, satisfied, and grateful “clients” of the welfare system are.
Memo to the federal government: Go really hard on any payday lender (or any business) that is guilty of fraud. Otherwise, keep your hands off.
*** See other entries at AlertMindPublishing.com in “Monthly Columns.” ***