It is difficult for many of us to imagine having to choose between paying the rent on time or purchasing our sick child’s prescription medicine. But for many Americans who live paycheck to paycheck, circumstances like these are an all-too-familiar reality. For these individuals who are credit-constrained, payday loans provide a financial solution when emergencies or other unforeseen events arise.
I know how important these loans can be: I myself relied on a short-term loan to establish my first law practice. At the time, it was the only avenue available to me.
It is both because of my own personal experience, and because I understand that many Americans at times require access to small-dollar loans to make ends meet, that I firmly believe consumers must maintain access to regulated payday loans. To assume that those of us in Washington, the vast majority of whom have never faced a similar predicament, know which types of financial products best fit consumers’ needs is both patronizing and counterproductive.
The payday statute in my home state of Florida is among the most progressive and effective in the nation. In the 14 years since its enactment, payday lenders have undertaken radical reforms that encourage the responsible use of payday loans. Floridians who utilize the services of payday lenders are treated fairly and with dignity. Indeed, it has become a national example of the successful compromise between strong consumer protection and increased access to credit.
Florida’s law prohibits a borrower from taking out a second payday loan to cover the original loan, often termed as “rollovers,” and limits a customer to a single advance of $500 or less. Payday lenders must cap their interest fees at 10 percent of the original loan, with the loan ranging from 7 to 31 days. Most significantly, a statewide database was established to monitor the industry and those who take out loans. Finally, if a borrower cannot repay a loan, the law provides for a 60-day grace period, during which the consumer must take part in credit counseling and set up a repayment schedule.
In March, the Consumer Financial Protection Bureau (CFPB) announced that it intends to implement rules to regulate payday lenders and other forms of short-term credit. The purpose of this regulation, CFPB asserts, is to eliminate “debt traps” by requiring lenders to ensure that customers can repay their loans through a variety of regulations.
While the CFPB has been consistent in its assurance that these new regulations will work in conjunction with existing state laws, the practical effect of such a regulatory framework will almost certainly result in a de facto prohibition on payday loans. To be sure, the commissioner of the Florida Office of Financial Regulation has, on numerous occasions, insisted that the cost of compliance with the CFPB’s proposed rules would far exceed any revenue received, rendering the service completely impractical. Credit reporting agencies and experts in the financial industry alike estimate that the implementation of the CFPB’s current proposals would put 70 percent of the industry out of business.
What, then, may we expect if a majority of those currently providing short-term, small-dollar loans are forced to close their doors? In Florida, thousands of jobs across the state will be lost. But perhaps even more discouraging, Floridians who use these services will be left with few legal options.
It is estimated that currently one in five households depend on payday loans and other forms of short-term credit to cover unexpected emergencies or ordinary living expenses. If we assume, as we must, that the principle of supply and demand will continue to hold true in the absence of payday loans, those same Americans will unquestionably be forced to turn to more costly and potentially unlicensed alternatives that are beyond the reach of regulators.
Several recent studies, including one conducted by the Federal Reserve Bank of New York, confirms this notion, finding that in states where payday loans are prohibited households bounce more checks, complain more to the Federal Trade Commission about lenders and debt collectors, and have filed for Chapter 7 bankruptcy protection at a higher rate. These statistics demonstrate what many of us already believe to be true — that a reduced payday credit supply results in increased credit problems — the exact phenomenon the CFPB seeks to avoid with its proposed rule.
Financial protection comes in many forms, and we must ensure that meaningful and robust safeguards exist to prevent predatory lending practices. However, the CFPB’s insistence on regulating payday loans to the point of near-extinction is not in the best interest of American consumers. Payday loans have served as a valuable safety net to countless individuals, and eliminating them outright would fail to provide financial protection to those who need it most.
Alcee L. Hastings, a Florida Democrat, serves as a senior member of the House Rules Committee, ranking Democratic member of the U.S. Helsinki Commission, and co-chairman of the Florida Delegation.