A new proposed rule that would ever so slightly curb the excesses of the payday loan industry is an exciting thing: the government, which represents us, acting against awful exploitative money vampires. The system works, a little bit!
The Consumer Financial Protection Bureau (an agency that you can thank Elizabeth Warren for) today announced a proposed rule aimed at making the payday loan industry—which lends relatively small amounts of money to poor people at exorbitant interest rates—somewhat less blatantly terrible. The rule would take the revolutionary action of “requiring lenders to take steps to make sure consumers have the ability to repay their loans.” In normal lending businesses, making sure consumers can pay back their loans is already viewed as a necessary step in giving a loan. But in the payday loan business, they would rather consumers not be able to pay back their loans—that is how you force them to constantly take out new loans to cover the payments on the old loans, building up ever larger mountains of debt until they are in a “debt trap” from which it is impossible for a low-income person to escape.
This sort of downward debt spiral is one of the most common financial hazards of being poor. And it is not just a risk of payday loans; it is the business model of payday loans. Research by the CFPB found that in a ten month study of payday loan borrowers, “more than 80 percent of payday loans taken out by these borrowers were rolled over or reborrowed within 30 days, incurring additional fees with every renewal.” Eighty percent! That figure speaks for itself.
The payday loan industry will say that regulations like this will make it harder for needy people to get credit. True. Which is why reducing the chance that poor people will fall into long term debt traps due to short term money needs is only the second best way of dealing with this issue. The best way is to make poor people less poor.