Payday Loans Get a Bit Easier to Obtain
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What is the main topic discussed in this episode?
your Money Briefing for Thursday, July 9th. I'm Charlie Turner for The Wall Street Journal. High-interest short-term loans, called payday loans, have been a controversial way of getting some quick cash. Now the Trump administration has made good on a promise to make them easier to get.
What recent CFPB action made payday loans easier to obtain?
This new version is missing the key element of the previous rule that would have made it very difficult for payday lenders to extend these super high interest loans repeatedly to the same customers.
That's our reporter Yuka Hayashi. She'll join us to explain the rule change and the debate it's ignited after the break.
The Consumer Financial Protection Bureau is rolling back an Obama-era rule that was designed to rein in payday lenders. Our reporter Yuka Hayashi is here to talk about what that means for payday loans and for the consumers who rely on them. First, Yuka, remind us what payday loans are and what their purpose is.
Sure. These loans are essentially high-interest consumer loans that largely target lower to moderate income consumers.
What are payday loans and how high can their interest rates be?
And some of these loans could carry interest rates as high as 400% on an annual basis.
And why are payday loans risky?
Essentially, the borrower must pay back these loans in two weeks. That's the name, payday loans. But a lot of lenders end up not being able to pay them back. So they're going to re-borrow the loans and interest rates start piling up. It sort of becomes like a bad cycle where people have a hard time getting out of.
What do payday lenders say in defending these kinds of loans?
Payday lenders say that there is definitely need for these short-term loans.
Why are payday loans risky and how do repeat borrows create debt cycles?
A lot of consumers do not have access to conventional credit cards and other types of loans because they sometimes do not have credit history or have impaired credit history. So there's definitely demand for these types of loans.
Okay, so talk about the changes the CFPB is making.
So the CFPB for years had been trying to introduce a broad rule to regulate this sector, which has up until now been regulated by states. So under the Obama administration, the agency wrote this very comprehensive rule that was opposed very strongly by the payday lender industry. But since the Trump administration came in, they put the rule on hold. and started working on a new version. And essentially, this new version came out. And this new version is missing the key element of the previous rule that would have made it very difficult for payday lenders to extend these super high interest loans repeatedly to the same customers.
So what could the impact of this be both on banks and on consumers who might take out payday loans to borrow money?
What changes did the Trump administration make to the Obama-era payday rule?
For consumers, things are going to remain pretty much the same. So these loans are available in states where these lenders are allowed to operate in. Banks and credit unions actually welcome the new rule. Some of the banks have been interested in entering this consumer finance market, but they've always felt that there wasn't clear guidance from regulators on how they could do this. And prior to the CFPB's new rule, other banking regulators, including the Federal Reserve and the FDIC, recently came out with a new joint guidance of their own that was also welcomed by banks. So with the new step by the CFPB, the banks and credit unions have more clarity on what they can and they cannot do in this space.
Well, what's been the reaction to the changes from other parties such as consumer groups and politicians?
So consumer groups oppose the latest action very strongly. And also Democrats, who have been very critical of industry for many years, came out very strongly. to criticize the CFPB's action. Interestingly, Joe Biden also came out and said that the CFPB's action was shameful at a time when a lot of consumers are facing very precarious financial situations because of the pandemic.
How likely are banks and other lenders to get back into the payday loan business?
How are banks, credit unions, and consumer groups responding to the rule rollback?
We have yet to see that. I think it might take a little while. But we are not going to see sort of the wholesale entry of banks into this space.
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Chapters
7 chapters
1
What is the main topic discussed in this episode?
0:06–0:22
2
What recent CFPB action made payday loans easier to obtain?
0:22–1:21
3
What are payday loans and how high can their interest rates be?
1:21–2:06
4
Why are payday loans risky and how do repeat borrows create debt cycles?
2:06–3:27
5
What changes did the Trump administration make to the Obama-era payday rule?
3:27–5:11
6
How are banks, credit unions, and consumer groups responding to the rule rollback?
5:11–5:36
7
Could future elections or regulators reverse these payday lending rules?
5:36–6:02
Speakers
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