Pay Day Loans – Challenges of New Financial Reforms
Matthew Vitko
Payday loans, small-denomination, short term loans against a person's next paycheck, as well as other alternative financial products have been targeted in the new financial reform bill just passed by the Conference committee in Congress on Wall Street reform. Although the details of new payday loan regulations will be in the hands of the new Bureau of Consumer Financial Protection, it seems likely those regulations will have a significant impact on the alternative financing landscape.
Payday loans became popular in the last twenty years as a way to help borrowers cover expenses until the borrower receives his/her next paycheck. Payday loans can be a lifeline for people who don't have access to credit cards or savings and are a preferred alternative for many consumers instead of paying steep bank charges for a bounced check or an overdue credit card.
Critics contend that many payday borrowers are enslaved by unreasonable fees and often refinance one payday loan after another, ending up in a destructive debt cycle. While many in the Payday loan industry will acknowledge the multiple payday loan problem, payday supporters like Larry Meyers believe payday loans provide important access to credit and that people should be able to make their own credit choices.
Meyers also believes that the new financial reforms will have a devastating effect on employers, employees, and customers in this sector. According to a survey by HIS Global Insight, there could be significant harm to Main Street if payday loan businesses were to be damaged by the new law - the Payday loan industry employs over 150,000 people and accounts for over $2.9 billion in wages. The industry contributes $10 billion to GDP annually, and generated $2.6 billion in federal and state taxes. Meyers adds that more than half of payday lenders are mom-and-pop stores.
Can Credit Unions fill the void?
According to USA Today, hundreds of credit unions have introduced short-term loans for members who face a temporary cash crunch. But some of the loans "are only marginally cheaper than traditional payday loans," says Lauren Saunders, an attorney with the National Consumer Law Center.
The National Credit Union Administration, which regulates federal credit unions, has issued guidance to its members, alerting them to the "risks, compliance issues and responsibilities" associated with a short-term loan program. Federally chartered credit unions are prohibited by law from charging more than 18% on loans, but fees can drive up the effective rate.
The National Credit Union Foundation's REAL Solutions program works with credit unions to establish payday loan alternatives for people with low wealth and modest means. Many short-term loan programs offered by credit unions require members to deposit a small percentage of their loan payments in a savings account and give members 30, 60 or even 90 days to repay their loans.
Multiple Loan Issue
Regardless of which entity provides a payday loan, the multiple loan issue is a problem for both the business and the regulators. Fee and interest rate caps may bring down the cost of short-term lending for the consumer, provided it does not drive the payday lenders out of business. However, enforcing limits on payday lending to address the multiple payday loan issue will be difficult until there is better use of data to track consumer lending and better reporting of payday loans.