What role do payday lenders play in the financial lives of low-income Americans?
Payday lenders extend credit by holding customers’ personal checks for a few weeks and providing cash in the absence of other traditional sources of credit (eg, credit cards). Research suggests that consumers who find it particularly difficult to access traditional sources of credit are more likely to apply for payday loans. This may be due to reasons other than a poor repayment history – they may simply lack a credit history or formal loans. (See Morgan, Strain and Seblani, 2012 and Bhutta, Skiba and Tobacman, 2015.)
Will the changes to payday loan regulations drive borrowers into debt, as some consumer advocates claim, or affect the availability of credit for low-income borrowers, as industry groups?
The answer is probably “it depends”. Research on this topic finds conflicting evidence of the impact of payday loans. There are various reasons for this, but it is probably due to the heterogeneity in the use of payday loans. For some borrowers, payday loans are used as bridging loans to cushion shocks, and these borrowers find them extremely helpful. In a lecture to the California Department of Business Oversight in November 2018, economist Adair Morse argued that since borrowers are grateful for the option of payday loans, it is out of place to ask whether they are inherently evil; the system may benefit from “product enhancements” that will better sort out who qualifies for these loans and how repayment terms may vary depending on very specific circumstances.
However, other payday borrowers seem to repeatedly borrow in ways that are likely financially detrimental. In a 2011 article, “The Real Costs of Accessing Credit: Evidence from the Payday Loan Market”, Brian T. Melzer wrote, “I find no evidence that payday loans alleviate economic hardship. On the contrary, access to loans leads to increased difficulty in paying mortgage, rent and utility bills. These contrasting points make it difficult to assess a clearly negative or positive effect of personal loans. This is made particularly difficult because many payday borrowers are low income and potentially vulnerable to predatory lending, but are also shut out of traditional credit markets and therefore benefit from access to payday loans.
To what extent are consumers currently protected by the CFPB?
It is difficult to measure and difficult to assess. The evidence I’ve seen seems to suggest that if banks complain about the cumbersome regulation of the CFPB, it doesn’t translate to significant negative effects on consumer lending.