They may not sound like it, but short-term, small-dollar loans are a big deal. Millions of borrowers depend on such loans, commonly referred to as “payday loans,” to cover the costs of medication, groceries, power bills, and other necessities during periods of financial hardship. Financial services companies also rely on these products—many would go out of business without them.
Of course, what matters to borrowers and lenders matters to regulators, too.
Short-term, small-dollar loans have long been a concern of the Consumer Financial Protection Bureau, with certain members of the agency calling for tighter restrictions on consumers’ ability to access the products. After years of conversation and conflict, the CFPB released the final version of its payday lending regulations in 2017.
As it turns out, those regulations are about as “final” as the payday lending industry is “small.” Under interim director Mick Mulvaney, the CFPB is reconsidering its payday loan rules. It seems short-term lending regulations have a relatively short term themselves.
“In early November of 2017, Richard Cordray left the CFPB and Mick Mulvaney became the interim director. Within two months, Mulvaney announced (in January of 2018) that the CFPB wanted to revisit the payday lending regulations with an eye toward their revision. Reports suggest that the agency is moving ahead with redrafting those rules, with revisions to be released in February of 2019. The new regulations are set to go into effect in August of 2019, though how much or how little they will resemble the current rules remains unknown.”
Although opponents and proponents of payday lending tend to politicize the issue, it seems payday loans are more complex than they get credit for (pun unintended).
There’s no single, straightforward economic driver behind their popularity, nor an all-inclusive picture of a “typical” short-term borrower. In another recent article, which we covered previously on the blog, PYMNTS examined 4 consumer profiles—which they termed “Shut Outs,” “Second Chances,” “No Worries,” and “On the Edge”—each with their own financial necessities and reasons for borrowing or not borrowing. These profiles demonstrate why received wisdom about consumer lending largely misses the mark, and how much we still don’t know:
“No Worries are the most financially secure persona in the mix: They earn the most money per year, have the highest rate of homeownership, have the highest rate of educational attainment and tend to utilize credit liberally, but responsibly. They don’t tend toward delinquent balances, have credit scores in the mid to high 700s and have a very strong track record of paying off what they buy and saving their earnings.
In many ways, Second Chances look to be the most like No Worries on paper—particularly in terms of homeownership, education, income and credit card use.
But under the hood, the picture is not so strong. Over 70 percent admit they have paid a bill late during the past year, and nearly 80 percent report living paycheck to paycheck, despite their higher income. About 13 percent report using personal loans of some flavor in the last year, as well as payday loans, online lenders, MoneyGram, pawn shops and RushCards. Pawnshops turned out to be a particular favorite in this group—61 percent of Second Chances used a pawnshop loan in the last year.”
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