BY BEN MORALES
The Consumer Finance Protection Bureau (CFPB) is currently considering regulations to limit the dispersal of payday loans and other high-cost, small-dollar loans by requiring an underwriting process that can adequately assess a borrowers’ ability to repay the loan. The regulations would fundamentally change the nature of small-dollar loans in this country, possibly even ending the services of many traditional payday lenders.The CFPB regulations are the result of repeated efforts to regulate predatory lending practices and minimize debt traps that have victimized many Americans. The issue has far reaching consequences beyond the scope of impacting payday lenders; affecting banks, credit unions and millions of underbanked Americans alike.
The Underbanked Consumer
Approximately 100 million people in the United States are either unbanked, meaning they have no checking or savings account, or underbanked, meaning they have some interactions with traditional financial institutions, but rely on the services of alternative financial service providers (http://files.consumerfinance.gov/f/201311_cfpb_report_empowering-economically-vulnerable-consumers.pdf). Small-dollar loans are one of the most prominent financial services the underbanked use to access cash. The underbanked rely on less-regulated payday lenders because they lack financial alternatives that most people use. There are twelve million Americans who regularly use payday loan services. These consumers spend more than $7 billion on loan fees outside the initial capital borrowed(http://www.pewtrusts.org/en/research-and-analysis/fact-sheets/2016/01/payday-loan-facts-and-the-cfpbs-impact). Recent Pew data showed that the average payday loan customer pays $520 in finance charges for every $375 in principal borrowed. Though the $375 loan is advertised for two weeks, on average the borrower remains in debt to the payday lender for closer to five months (http://www.pewtrusts.org/en/multimedia/data-visualizations/2015/payday-loans-and-tax-time ). These high fees are the cost many Americans must pay to gain necessary liquidity.