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Posts Tagged ‘Short-Term Lending’
August 18th, 2022 at 6:01 pm
Amid Recession and High Inflation, Groups Like the “National Consumer Law Center” Seek to Narrow Rather Than Expand U.S. Consumer Lending Options
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As inflation continues to spiral upward at multi-decade highs and with the U.S. economy now in recession, maintaining an “all of the above” array of lending options for American consumers becomes more and more important.  Unfortunately, activist groups like the “National Consumer Law Center” aim to do the opposite and limit rather than expand consumer options.

For a sense of consumers’ growing desperation, consider a Federal Reserve report on exploding credit card debt, as highlighted by Steve Cortes:

How have consumers dealt with these skyrocketing prices? The simple answer, unfortunately: via credit cards, particularly for working-class households. Just last week, the Federal Reserve Bank of New York issued a damning report on this credit binge for consumers, into a pronounced economic slowdown.

Total consumer debt rose a staggering $40 billion in June, far surpassing Wall Street expectations of a $25 billion increase…

A huge portion of this new debt flows from costly, risky credit card use. In fact, for the April-June second quarter of 2022, total credit card debt rose a staggering $46 billion, the biggest jump in 20 years. Americans pile into new accounts to accomplish this borrowing, opening up a whopping 233 million new cards during that second quarter, the most new cards since 2008. Such comparisons to the Great Recession should worry everyone.”

Additionally, credit cards aren’t always a viable option for many Americans, and traditional bank loans aren’t always an option due to small amounts needed for short-term emergencies.  Whereas higher-income Americans with stronger credit history can borrow from banks, utilize assets they possess as leverage or use their savings, consumers with lower credit scores or lacking sufficient savings cannot.  Indeed, according to the Fair Isaac Corporation, some 46% of consumers possess credit scores below 700, meaning that traditional bank loans aren’t possible for them.

In such circumstances, struggling Americans can access the money they need for the short-term via consumer finance loans.

Groups like the National Consumer Law Center (NCLC), however, want to limit the availability of such options, which they falsely characterize as some sort of scheme “to snare consumers into predatory loans for auto repairs, tires, furniture, and even pets.”

In reality, however, the unintended consequence of efforts like that of the NCLC will be to drive temporarily strapped consumers to seek out illegal loansharks, suffer overdrafts, or simply be unable to cover their temporary costs.  As none other than the World Bank found, such limitations lead to “increases in non-interest fees and commissions; reduced price transparency; lower number of institutions and reduced branch density; and adverse impacts on bank profitability, in addition to the lack of access for smaller and riskier borrowers.”

That doesn’t help the people whom groups like the NCLC claim to protect, it hurts them.  Accordingly, American consumers and elected leaders should recognize the peril that NCLC and similar groups present.  Their efforts would only make consumer lending more difficult, more dangerous and more expensive.

July 5th, 2022 at 12:00 pm
Federal Regulators Again Target Short-Term Lending, Hurting Struggling Americans They Claim to Help
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We’ve often highlighted how federal and state regulators who target short-term lenders only end up hurting the struggling Americans they claim to be helping.

That dynamic is even more pronounced in times of increasing economic uncertainty like today.

According to a 2018 study from the federal government itself, nearly 40% of American families don’t possess sufficient savings to cover even a $400 emergency expense, including 51% of military service members living paycheck-to-paycheck.   For such people, credit cards aren’t always a viable option and traditional bank loans aren’t feasible because of the small amounts involved.

They can, however, access desperately-needed money for the short-term via consumer finance loans.   Unfortunately, the Biden Administration, the Pelosi-Schumer Congress, federal bureaucrats who think they know better and government officials at the state and local levels constantly pursue legislation and regulation to make consumer finance lending less available.  As a consequence, vulnerable Americans are forced to seek illegal loansharks, suffer overdrafts or simply fail to pay their pressing bills.

Our friends at National Taxpayers Union (NTU) commendably highlight the latest dangerous Biden Administration effort in a piece entitled “The Consumer Financial Protection Bureau Continues to Attack the Financial Industry”:

While taxpayers look for relief from out-of-control inflation, the Consumer Financial Protection Bureau (CFPB) continues to attack the financial industry, tipping our already unstable economy further over the edge…

As recently as April CFPB announced they would be invoking a long dormant authority to examine nonbank financial companies or ‘fintech’ companies.  CFPB inaccurately posits that these nonbank entities are harmful to consumers, however these companies often represent some of the only credit available to struggling Americans who have been continuously left behind by traditional institutions.  At a time when the economy is faltering and everyday Americans’ financial futures are so uncertain, the CFPB’s action seems misplaced.”

As NTU rightly concludes, “in many cases these institutions are doing the exact opposite of what CFPB claims, they are providing a lifeline to their users and breaking barriers to traditional institutions.” 

As our economy weakens due to the Biden Administration’s own counterproductive economic policies, the least it could do is avoid making matters even worse for struggling Americans increasingly desperate for a workable lifeline, non-traditional lenders.

January 31st, 2022 at 5:17 pm
NM House Bill Targeting Consumer Lending Would Harm Vulnerable Consumers It Falsely Claims to Protect
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Whenever governments at any level artificially cap interest rates on consumer installment loans, they claim to be acting on behalf of vulnerable and lower-income Americans.

For straightforward reasons according to the laws of economics, however, such efforts only end up counterproductively harming the very people they allegedly help.

Sadly, we’re witnessing yet another effort tempting that destructive spiral in New Mexico, where the House of Representatives Consumer and Public Affairs Committee has approved by a narrow 3-2 margin H.B. 132, a proposal that would cap interest rates on consumer loans.

Making matters worse, the Committee even gutted funding for financial education in New Mexico, thereby evading reference to the House Appropriations Committee, in deceptive fashion to rush the bill through.

At a simplistic level, government laws regulating lending services and capping repayment rates may seem helpful to Americans struggling paycheck-to-paycheck.  But the real-world impact only eliminates a source of reliable, legal short-term loans to get them through temporary emergencies.

According to a 2018 Federal Reserve System Board of Governors study on the economic wellbeing of U.S. households, nearly 40% of American families don’t possess sufficient savings to cover even a $400 emergency expense.  Alarmingly, that same study noted that 51% of military service members live paycheck-to-paycheck.

Because of their credit profiles, credit cards aren’t always a viable option for such people, and traditional bank loans aren’t an option due to the small amounts at issue.  Whereas higher-income Americans with stronger credit history can borrow from banks, use assets they possess as leverage or access savings amounts, American consumers with lower credit scores and insufficient savings cannot.  In fact, according to the Fair Isaac Corporation, some 46% of consumers possess credit scores below 700, meaning that traditional bank loans aren’t possible for them.

That’s where consumer finance loans come in, providing a critical life preserver for lower-income Americans and New Mexicans.

In such circumstances, struggling Americans can access the money they need for short-term emergencies via consumer finance loans.  But under H.B. 132 as contemplated by the New Mexico House, consumer finance lending will only become economically unsustainable and therefore less available.

In turn, the unintended consequence will be more people seeking out illegal loansharks, suffering overdrafts, or simply being unable to cover their temporary costs.  As the World Bank aptly summarized, regulatory and legislative proposals like H.B. 132 lead to “increases in non-interest fees and commissions; reduced price transparency; lower number of institutions and reduced branch density; and adverse impacts on bank profitability, in addition to the lack of access for smaller and riskier borrowers.”

Obviously, that quickly ends up punishing the very people that legislation like H.B. 132 claims to protect.  It only threatens to make consumer finance lending more difficult, more expensive and less available.