NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Wednesday, June 8, 2016

Payday loans, as widely practiced, rarely end with the borrower simply paying the lender back.

Instead, the product typically creates a downward spiral of debt, long past the receipt of the borrower’s next paycheck. Therefore, the Consumer Financial Protection Bureau has taken an admirable step to eliminate many of the worst practices in the small-dollar credit market with the proposed rule it released last week.

The agency’s proposal protects borrowers from unaffordable loans, cycles of reborrowing, and exorbitant fees—all positive steps in reducing consumer harm. But if the final rule doesn’t create a clear lane for good lenders to step in with a variety of new loan product designs, the CFPB risks leaving important consumer needs unfulfilled. Not everyone who can get a payday loan today should be getting credit, but the proposed rule may ultimately leave too many people behind.

The needs that drive consumers toward payday lenders, after all, will remain. A Center for Financial Services Innovation study found that more than a third of all households say they frequently or occasionally run out of money before the end of the month. Further, more than four in 10 households struggle to keep up with their bills and credit payments.