President Obama with CFPB Director Richard Cordray
The Consumer Financial Protection Bureau is doing its job again, this time targeting legal loan sharks, the
payday loan industry with rules to rein in their most abusive practices.
The rules would cover a wide section of the $46 billion payday loan market that serves the working poor, many of whom have no savings and little access to traditional bank loans. The regulations would not ban high-interest, short-term loans, which are often used to cover basic expenses, but would require lenders to make sure that borrowers have the means to repay them. […]
On Thursday, Mr. Obama lent his weight to the consumer bureau’s proposal, saying that it would sharply reduce the number of unaffordable loans that lenders can make each year to Americans desperate for cash.
"If you lend out money, you have to first make sure that the borrower can afford to pay it back," Mr. Obama said in remarks to college students here. "We don't mind seeing folks make a profit. But if you’re making that profit by trapping hard-working Americans into a vicious cycle of debt, then you got to find a new business model, you need to find a new way of doing business."
David Dayen has
the details of the proposed rules and a solid critique of them. Consumer advocates are supportive, but want the rules to go a lot further, pointing out that the rules would still allow lenders to make six unaffordable loans every year, "creating enough fees in some states that the borrower would owe $1,250 on an initial $500 loan." Advocacy groups want the agency to use the same authority it has to mandating an ability-to-repay standard for mortgage loans to payday loans. They also want the lenders to be prevented from creating lump-sum balloon payments at the end of a loan, payments which are devastating for low-income borrowers.
As Dayen says, the problem with payday lending goes far beyond their practices to their very need for existence. The working poor shouldn't actually be poor—work should provide a living wage and government's function should be ensuring that. That's going to take a political revolution, starting with Democrats taking over the Congress and progressives taking over the Democratic party. In the meantime, the CFPB is off to a pretty good start reining in these abusive loans. But they can, and should, do more in the final rules.