by Mitch Kokai
Senior Political Analyst, John Locke Foundation
In 2017, the Federal Reserve estimated that one in four American families did not have enough savings to take care of an unexpected $400 expense. Since the pandemic lockdowns, that number has grown, as many Americans have been financially flattened.
For some people with poor credit ratings, the answer has been to get an emergency loan. In the past, that has often meant going to a storefront for a “payday loan.” Such loans often developed a negative reputation because they charged high interest rates for a loan only two to six weeks in length. So when the Consumer Financial Protection Bureau (CFPB) was created by President Obama in 2011, Congress gave it specific powers to regulate all short-term lenders.
But the growth of the Internet has meant that many of these loans are shifting to innovative online products that offer a longer repayment term and better terms. They typically offer loans of between $1,500 and $10,000, with no requirement for collateral or a potentially intimidating meeting with a loan officer.
But critics of “payday loans” blame all the alleged problems of such products on the online loan industry. Senator Elizabeth Warren, who was the creator of the CFPB, says consumers have difficulty in understanding the new products, make poor choices as a result, and must be protected.
But the CFPB itself wasn’t sure whether more regulation was the answer. …
… In the last year of the Trump administration, the CFPB proposed a rule to allow financial institutions to once again offer creditworthy individuals easier access to loan products. Senator Warren quickly responded that “this new rule eliminates crucial protections for borrowers and makes it clear that the CFPB is not doing its job to protect consumers.” The CPFB may be on the verge of scrapping the Trump-era rule and effectively banning online lending.
Many minority business owners find all this paternalistic and insulting.