There used to be an old cartoon that ran on Saturday mornings, called Schoolhouse Rocks. These short, animated shows tried to help make sense out of seemingly complex things. One of the most popular episodes was about how a bill becomes a law. It was a fun show that taught lots of kids (and adults) the basics of how bills become federal laws. However, in real life getting new rules put into place at the federal level is not quite as cut and dry as this classic cartoon might like you to believe.
For example, the Consumer Financial Protection Bureau (CFPB) is pushing hard to enact new rules that would drastically change the way that payday lenders do business. As a matter of fact, the CFPB believes that the implementation of their new rules would reduce the payday lending industry by about 84 percent. But the new rules they are proposing are not simple to understand, and to people in the payday lending industry, along with those who support free market principles, these rules don’t make any sense at all.
Here’s what you need to know about the new payday lending rules, in a nutshell:
The CFPB has been working on the proposed payday lending rule for some time now. They finally unveiled their latest draft earlier this summer. Supporters of the rule have even exclaimed that it would usher in an end to “payday loan traps.” Here’s the thing, though – the document that contains the rule spans over 1,300 pages. It addresses shorter term loans and some types of long term loans. It restricts the structure of certain types of loans and puts serious limitations on how lending companies can collect on loans. There are even provisions for how lending companies handle their records, and how long they must maintain records. The rule is currently open for public comment, and will be so until September 14th. The CFPB has asked stakeholders to check it out and to reply with any comments they believe apply to the law.
The biggest blow to payday lending companies would come in the form of excessively in depth checks that lenders must make prior to giving loans to their clients. The CFPB wants to force lending companies to verify how much money people make, how much debt they have, what their household expenses are and other financial information. After the lender collects all of this information and verifies it (which would require a lot of extra manpower and expenses that the lenders must pay) they must only provide loans to people who would be able to pay back their loans without going through financial difficulties.
As you can imagine, these checks and balances will add up to a lot of effort on the part of lending companies. The larger payday lenders should be able to keep up with these changes, but hundreds of small lending companies will likely have to close up their shops. There is also a provision in the new rule to put caps on how many loans a person can take out during a calendar year. That provision plus the additional checks will greatly reduce the total number of short term loans that can be created during any given year. That limits potential profits for lenders. And it will all add up to bad news for both lenders and borrowers if this rule goes through as-is. Lenders will have to close their businesses. People will lose their jobs at these locations. And, finally, low income households will have limited access to short term lines of credit when they are in need of emergency cash.