A Point of Clarification on Our Payday Loan Findings
The Consumer Financial Protection Bureau faces a tough balancing act as it seeks to issues a proposal to rein in high-cost payday loans. A chief concern is what will replace payday lenders if federal regulations force many of them to shut down.March 21
The Consumer Financial Protection Bureau's plans for revamping payday lending set off a fierce debate Thursday over whether the agency had gone too far or not far enough, proving that this is likely to be one the trickiest rulemakings the agency will ever attempt.March 26
In a March 23 op-ed in American Banker, former Federal Deposit Insurance Corp. Chairman William Isaac voiced his concern about the Consumer Financial Protection Bureau's proposals to regulate the small-dollar credit market, fearing that overly burdensome regulation would stifle this market and leave vulnerable consumers without access to credit or drive them to more harmful credit products.
In his argument, Isaac cited a report we wrote which summarizes roundtable discussions held with researchers and consumer finance regulators on small-dollar credit regulation. The roundtables brought together contrasting views about how best to protect consumers from harmful products while leaving room for products that serve the needs of low- and moderate-income households.
While Isaac raised some important points from the report, there are other critical points that he omitted that provide needed context. Chiefly, some of today's credit products and practices risk leaving consumers trapped in a cycle of debt. Analyses by Pew, the Center for Responsible Lending, and the CFPB document the risk consumers face falling into "debt traps," finding that large shares of payday loans come from repeat borrowers, who can end up paying more in fees and interest than the original loan value.
We agree that the need for safe financial products, including credit products, won't disappear for low- and moderate-income consumers; and that if regulators clamp down on current products, their focus should be on promoting safe, affordable alternatives to meeting small-dollar credit needs. Consumers have a market need that should be met, but hard work is left to find products that make sense for both lenders and consumers. Urban Institute roundtables identified an important agenda for further research and action, and Urban is eager to work with policymakers, consumers, and providers to find new solutions that work.
Signe-Mary McKernan and Caroline Ratcliffe are senior fellows, and Caleb Quakenbush is a research associate, at the Urban Institute.