Some in the business community may look down on the small dollar lending industry but given the lackluster economic “recovery” of the last few years it has gained a toehold across America. The customer base serving millions of Americans who live paycheck to paycheck and are often in need of a small, short-term loan to fill a need like a car repair. The growth of the industry and the revenue streams of Cash America International (CSH), First Cash Financial Services (FCFS), and to a lesser extent EZCORP (EZPW) are proof of its need, especially among with working families and the increasingly cash-strapped middle class that are often left out of traditional banking services.
To be fair, small dollar lending is not without risks. Default rates hover near 40% another reason why bigger banks that have tightened up their lending standards refuse to serve the market. That being said, the federal government appears to have set out on a deliberate course to damage, if not destroy the industry as a whole, failing to understand both the risks and the mathematics of short-term lending.
The commonly understood phrase “The power to tax is the power to destroy” derived from the famous Supreme Court decision, McCulloch v. Maryland. The same inferred when it comes to over burdensome regulations -the power to regulate is the power to destroy over time. Just ask small community banks that are grappling with costs to comply with Dodd-Frank. Those costs are likely to spur another round of community bank consolidation, which will also serve to limit the availability of funds to those in need.
That’s not to say that all regulations are bad and consumers tend to support reasonable regulations, ones that make sense, such as regulations that protect people from food that will make them sick or protect them from a dangerous product. They tend to draw the line when regulations that are purported to help them in the name of consumer protection, make things more challenging if not out right difficult for them by prohibiting access to services or in this case capital.
In addition to thousands of storefront lenders that you can find on most main streets in most cities, there are dozens of online lenders that now face the draconian threat of a controversial Consumer Financial Protection Bureau (CFPB) proposal. A recent report prepared by Charles River Associates for the Community Financial Services Association of America (CFSA) found that the CFPB’s contemplated proposals for payday (and other small-dollar, high-rate) loans would cut small payday lenders’ revenues by 82% on average, potentially forcing these lenders to close many existing stores and more importantly, eliminate credit options for millions of Americans.
Consumers who don’t have a long credit history or seeking a $500 can’t get a loan from
The CFPB is so named to protect the consumer, not destroy an industry that is addressing a pain point that is alive and well. Perhaps the thinking is to gloss over any signs of the industry as it is a reminder of the glaring shortfall of the current economic recovery.
On March 26, 2015, the CFPB announced “proposing rules that would end payday debt traps by requiring lenders to take steps to make sure consumers can repay their loans.” This sounds reasonable until you read the parameters of the new rules. The contemplated rules create new paperwork and are clearly a back door way to get the industry to shut down. The proposal would impose a government cap on interest rates that are calculated over the course of a year. Let’s remember, however, that short-term lending is for… the short term.
Using annualized interest rate calculations are misleading and are comparing apples and oranges. If you borrow $100 and pay back $115 in a week, the annualized rate of interest would be outrageously north of 700%. Applying a full year APR is comparable to annualizing monthly gains on call options. Let’s remember these short-term loans aim to get people over the hump or through an unexpected occurrence. Much like touting the current unemployment rate that has largely fallen because more people have left the work force or have had to take on multiple part-time jobs (each of which is viewed as an individual job) because they could not get full-time paying one, comparing short-term lending and annualized interest rates shows the government needs to brush up on its basic math skills.
Congress should not allow one agency of government to impose by bureaucratic fiat the wholesale destruction of an industry, particularly one that serves the needs of the middle and working class.
