By Ben Morales, CEO of QCash Financial [12.11.2017]
The CFPB recently released its finalized payday lending rule that will make it very burdensome for lenders to offer loans with an interest rate higher than 36 percent APR and with a loan term shorter than 45 days after July 2019, when the rule goes into effect. This ruling will have a profound impact on the current state of the payday lending industry and on the millions of consumers who rely on these loans to help them manage through often challenging financial circumstances. As payday loans become less available, consumers will need an alternate source for their small-dollar loan needs.
As a result of the ruling, approximately 18,000 payday lenders will be directly impacted. These payday lenders will either need to drastically change their business models, or leave the market place. As it stands, many of these payday lenders will not find their businesses profitable under the new regulations and will likely go out of business entirely; however, the consumer need for these products will not go away. Consequently, the tens of millions of consumers that regularly apply for payday loans in a single year will be forced to find alternative sources for their liquidity issues.
The potential impact of the sudden loss of access to payday loans could be devastating to consumers, but also to communities. As communities lose access to traditional payday lending products, those who will be most impacted are the large groups of consumers who fall into the working poor category: people who spend 27 weeks or more in a year in the labor force either working or looking for work, but whose incomes fall below the poverty level (Center for Poverty Research). These individuals, who may not have access to traditional lending services or may not have the credit scores to qualify for these products, will begin to have to make hard decisions about where to allocate limited resources. For example, with limited budgets, consumers will have to decide where to spend money when faced with housing, healthcare, transportation and food expenditures that exceed their incomes. If a consumer puts off necessary car repairs, then suddenly has a broken-down car, this impacts his transportation for work, and jeopardizes his income. Similarly, if a consumer is forced to forgo buying healthy groceries in order to pay her rent, her long-term health may be impacted, and her ability to work. Without access to small-dollar loan products, these consumers may be forced to risk their long-term financial stability, which in turn impacts local economies when multiple families are unable to pay their day-to-day expenses.
In order to address the sudden lack of payday loans when the industry responds to the CFPB regulation, trusted financial institutions should offer compliant small-dollar loans to their communities. By leveraging automated technology for greater efficiency, financial institutions can become a trusted resource for inexpensive loans to their communities. Without access to instant liquidity options in the marketplace, many communities will begin to suffer as consumers are unable to stretch their budgets to cover their expenses. Replacing payday loans with compliant, reasonably-priced alternatives will help the working poor consumers thrive, instead of irrevocably weakening the millions of households that currently turn to payday loans for their needs.
If not us, who? If not now, when?
Ben Morales is the CEO of QCash Financial. QCash Financial is a CUSO providing automated, cloud-based, omni-channel small-dollar lending technology that enables financial institutions to provide short-term loans quickly to the people they serve. QCash Financial, a wholly owned subsidiary of WSECU in Olympia, Wash., started as a short-term loan solution for the credit union’s members in 2004.