How to Keep Credit Flowing Under CFPBs Payday Plan
The impending Consumer Financial Protection Bureau proposal will limit access to payday lending but it will not enable small-dollar lending alternatives for consumers.April 12
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
There are far more payday lending stores than McDonald's restaurants in almost every state in the nation. But unlike McDonald's burgers, payday lending is rarely affordable and generally not digestible.
A mission impossible has been requested of the Consumer Financial Protection Bureau: clamping down on unaffordable payday loan debt traps while still ensuring access to much-needed credit for the typical McDonald's customer base — the 70% of Americans who live from paycheck to paycheck, according to our data.
It is indisputable that the majority of those who work from paycheck to paycheck, including the overwhelming majority of our nation's 130 million minorities, need access to credit that is not presently supplied by our regulated financial institutions. It is also indisputable that none of the present viable and profitable payday lending centers is willing to lend even at or below 36% interest rates annualized. Therefore, it is difficult to see how the underserved's primary champion, CFPB Director Richard Cordray, can solve the problem of affordable access.
Supporting our mission impossible thesis are the many experiences of Americans who utilize payday lending at military bases. For instance, near one of our San Diego offices, which is also in the vicinity of a marine base, are four payday lenders. When we had a public hearing on payday lending there, more than half of the attendees — mostly immigrants — said they are not in favor of removing payday lending until there's an alternative.
Sure, some of us writing this op-ed have developed reasonably successful microlending programs at interest rates of 14% and default rates of 3%. But we are only successful because of our decision to limit our lending to those highly likely to repay the loans.
Broader availability would likely mean higher interest rates and higher default rates, but rates would still need to be affordable. Assuming, as we do, that small short-term loans are essential in an entrepreneurial nation such as ours, are there any solutions? We are not sure. However, after our recent meetings to minimize income and wealth inequality with Cordray, Federal Reserve Board Chair Janet Yellen, Comptroller of the Currency Thomas Curry and Federal Deposit Insurance Corp. Chairman Martin Gruenberg, we have three suggestions for pilot programs to try. The ideas are consistent with the recent White House blog post declaring that “we have a moral obligation as a country to do something to stop payday lenders from preying on consumers by trapping them in an endless cycle of debt.”
First, regulators could create incentives for regulated institutions to observe a maximum annual interest rate of, say, 24% up to 36%. Additional Community Reinvestment Act credit — perhaps two to three times greater than given for a general loan — would be given to a financial institution that produces a widespread and successful program within these interest rate limits.
Second, banks should allocate up to 0.01% of FDIC insurance payments to a fund that would assist and reward financial institutions that can document successful implementation of modest payday interest rate caps. As of June, the FDIC Deposit Insurance Fund was approximately $67.6 billion, so one hundredth of one percent would be approximately $680 million.
Third, we could subsidize responsible nonprofits, including church groups and organizations like ours to submit pilot lending program proposals to qualify for subsidies. The subsidies could come from the U.S. Department of Justice's multibillion-dollar settlements with financial institutions and/or fines collected by the bank regulatory institutions, including the CFPB.
America is a great nation. Therefore, we should promote a quasi-free-enterprise solution, as proposed herein, to ensure that short-term credit keeps flowing after implementation of the CFPB's payday lending rule. What we should not do is put the sole burden of a mission impossible solution on the CFPB.
Faith Bautista is the president and CEO of National Asian American Coalition. Gil Vasquez is managing partner of the certified public accounting firm Vasquez & Co. LLP and chairman of the Los Angeles Latino Chamber of Commerce. Mark Whitlock is pastor of Christ Our Redeemer A.M.E. Church in Orange County, Calif. All are members of the National Diversity Coalition.