CFPB gutted “ability to pay” requirements for payday lenders. The result is the Payday Loan Pandemic:
Americans living paycheck to paycheck and seeking financial security deserve better options to make ends meet than underregulated loans with ultra-high interest rates. But will it ever be better?
Not anytime soon, it seems. On July 7th, the Consumer Financial Protection Bureau (CFPB) rescinded a plan that would have saved payday borrowers over $7 billion a year in fees. That’s right—you read correctly—seven billion dollars.
The New York Times reports that the Consumer Bureau scrapped a portion of the plan that would impose new limits on payday lending, the “identification” provision, which states that it is “an unfair and abusive practice for a lender to make covered short-term loans or covered longer-term balloon-payment loans without reasonably determining that consumers will have the ability to repay the loans according to their terms.”
The proposed plan would have been the “first significant federal regulations” for payday lending, limiting how many loans borrowers could take in a row and requiring lenders to verify that their customers had the means to pay back their debt.
However, the bureau found that there was insufficient evidence to determine if requiring businesses to evaluate consumers’ “ability to repay” the loans would benefit borrowers more than it would harm lenders. Furthermore, current CFPB director, Kathleen Kraninger, said that tossing out the planned restrictions would “ensure that consumers have access to credit from a competitive marketplace.”
However, this “competitive marketplace” is an industry that makes $30 billion a year from high-interest, short-term loans issued to Americans living paycheck to paycheck, often trapped in vicious cycles of debt and incurring monthly fees that they cannot afford.
Remember, the proposed limitations would have saved consumers some $7 billion a year in fees, based on the consumer bureau’s estimates, but because the “ability to repay” portion of the plan was rescinded, the majority of American workers who borrow from these programs will continue to face high interest rates and fees. While lenders will still gain their $7 billion annually, workers will lose that much as they try to balance everyday expenses with the reality of living paycheck to paycheck.
Although this week’s ruling makes it seem like there is little to be done to improve lending practices, PayActiv believes employers can offer the right financial tools to keep workers from relying on loans in the first place.
PayActiv’s mission is to reduce the systematic burden placed on millions of American workers living paycheck to paycheck. As the leading provider in Earned Wage Access (EWA), PayActiv partners with employers across the nation to provide over 1 million workers with instant access to wages, allowing them to avoid banking and lending practices that benefit from cyclical debt.
By offering a financial wellness benefit such as PayActiv, employers provide their employees with tools they can use to reach financial wellness and resilience. Our workers need the help—just last year, 69 percent of employees said they found dealing with their financial situation stressful, up from 47 percent in 2018.
With earned wage access, PayActiv users can access their already earned, yet unpaid wages as they need them, thereby avoiding the accumulating fees and interest payments that cause so much stress. In a survey of over 2,000 workers at over fifty companies, PayActiv found that 22 percent of its users were able to avoid payday loans altogether (and a total of $22,426 in fees). PayActiv users also avoided overdraft fees, credit card fees, late fees, and other loans, such as installment loans, title loans, and pawn shops, because they had instant access to their wages.
PayActiv’s employer partners also benefit—they have reduced employee turnover by over 30 percent. That’s not surprising, as employees who feel financially empowered and valued by their employers tend to stick around.
Companies have a chance to make a positive impact on the business while also helping their workers living paycheck to paycheck. Because PayActiv is a Public Benefit Company, it is committed to creating public good through its services, and because of this commitment, users have saved $240 million in fees and interest alone.
If government policy won’t treat American workers better, it is up to American businesses to do so. Imagine what could happen if more businesses gave their employees the financial tools to make significant, empowering change in their lives. That $7 billion would stay in the workers’ pockets, in their homes, and in their communities, where it belongs.
 “Payday, Vehicle Title, and Certain High-Cost Installment Loans,” 12 CFR Part 1041, Bureau of Consumer Financial Protection, 2020. https://files.consumerfinance.gov/f/documents/cfpb_payday_final-rule-2020-revocation.pdf