There has been much talk in recent years about a perceived need to regulate or even eliminate the payday loan industry. According to several new studies, consumers agree that some changes should be made to payday advances. However, these studies also show that consumers overwhelmingly want paycheck advances to remain available to them, even if they remain unchanged and unregulated. Legislators and consumer advocacy groups should consider this valuable consumer input before they propose new legislation to regulate payday lending.
The Pew Charitable Trusts’ latest report on payday lending in America, which was released in February 2013, found that even if no changes are made to payday loans, 3 out of 5 payday customers will continue to use these accessible short-term loans to cope with tough financial situations. The majority of storefront and online payday advance borrowers informed the Pew researchers that they would be likely to take out another payday advance in the future. Most respondents to the Pew survey indicated that they viewed paycheck advances as a convenient way to get out of a financial bind.
Many payday loan customers report that they would prefer to go through an online or storefront payday lender instead of having to ask a friend or family member for money. Payday customers also indicated that they considered cash advances to be a useful tool in today’s tough economy. Many customers expressed satisfaction with their payday advance experience. Some respondents commented on the excellent customer service they received, while others appreciated the ease and relief of receiving much-needed cash assistance. At the same time, some customers say that they would like to see some changes in the structure of paycheck advances.
Payday lenders have taken note of their clients’ concerns. The Online Lenders Alliance (OLA) responded to the latest Pew study by calling for continued innovation among payday lenders to create a greater variety of financial resources for the underbanked. Lisa McGreevy, President and CEO of the OLA, said that the Pew study findings “are consistent with what recent studies by the American Bankers Association and the FDIC have also shown: consumers have very limited short-term credit options, are looking to traditional payday loans for help, but want more choices to meet their short-term credit needs.” McGreevy stressed that OLA and its member companies are working to address rising consumer demand for short-term loans by encouraging innovation and the establishment of best practices within the payday lending industry to protect consumers. “We support a federal charter for short-term lenders that will create nationwide regulations for the industry, increase consumer access to credit and foster innovation to create longer-term credit products,” McGreevy added.
The primary agencies that have the authority to regulate the payday loan industry are the Consumer Financial Protection Bureau (CFPB), the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC). It is important to note that traditional storefront and online payday lenders are not the only sectors that offer payday advances. Many mainstream banks offer deposit advances, which are a paycheck advance equivalent. In addition to federal agencies such as the FDIC, individual states have the authority to regulate check advances and equivalent short-term loans. Some states have banned paycheck advances, while others have implemented regulations such as capping interest rates or requiring longer payback periods for borrowers. However, most states have not instituted these types of regulations on the payday advance industry.
State and federal agencies should keep consumers’ needs and interests in mind when considering new regulations on payday lenders. As the latest Pew report demonstrates, paycheck advances are used routinely by millions of underbanked consumers with limited options for short-term loans. These small personal loans continue to provide reliable financial assistance to consumers in an emergency. The millions of consumers who use payday loans each year need more, not fewer, options for short-term credit.