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The Consumer Financial Protection Bureau’s (CFPB) “payday rule” is on the chopping block.
Mick Mulvaney’s CFPB recently voiced support for a motion to reconsider the mandate, bringing it one step closer to repeal. His agency described the payday rule as “arbitrary and capricious.”
Consumers - Payday - Rule - Lenders - Barriers
Consumers everywhere can rejoice. The payday rule not only undermined short-term lenders, but it also erected barriers to capital for low-income Americans, who rely on payday loans to pay a month’s rent, cover healthcare costs, and manage other recurring expenses.
To understand why, it’s important to understand the payday rule’s origin. That story begins in 2016, when then-CFPB director Richard Cordray first issued a mandate to regulate short-term lenders and rein in, according to the agency, interest rates of 300 percent or higher. In Cordray’s words: “The CFPB’s new rule puts a stop to the payday debt traps that have plagued communities across the country.”
Reality - Payday - Loan - Fee - Cordray
In reality, the average two-week payday loan of $100 comes with a $15 fee, which Cordray’s CFPB equated with an annual percentage rate (APR) of 400 percent. Of course, the $15 fee is standard practice for two reasons: Not only do short-term loans provide credit with a quicker turnaround than other loan options, but the borrowers often have risky credit histories.
Short-term lenders tend to service low-income communities, which saddle them with more financial unpredictability. As a lender, should you treat C-suite executives and part-time restaurant workers with the same level of scrutiny?
CFPB - Debt - Trap - Narrative - Scrutiny
The CFPB’s “debt trap” narrative could use some scrutiny of its own—because it’s just not true. A 2009 study from Clemson University found that payday loans do not lead to higher rates of bankruptcy. According to economics professor Michael Maloney, one of the study’s co-authors, payday loans actually “appear to increase the welfare of consumers by enabling...
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