Payday Loans Get a Bit Easier to Obtain

Summary

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WSJ Your Money Briefing

Episode Summary: "Payday Loans Get a Bit Easier to Obtain"

Date: July 9, 2020
Host: Charlie Turner (B)
Guest: Yuka Hayashi, Wall Street Journal Reporter (C)

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Episode Overview

This episode focuses on recent regulatory changes affecting payday loans in the United States. Host Charlie Turner and WSJ reporter Yuka Hayashi discuss the Consumer Financial Protection Bureau’s (CFPB) rollback of Obama-era rules intended to restrict payday lending, the arguments for and against these high-cost, short-term loans, and how banks, consumer advocates, lenders, and politicians are responding to the shift.

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Key Discussion Points & Insights

1. What Are Payday Loans?

[01:26]

• Definition: High-interest, short-term consumer loans targeting lower to moderate income people.
  • "Some of these loans could carry interest rates as high as 400% on an annual basis.” (C, 01:32)
• Mechanics: Borrowers must repay within two weeks—hence the name "payday loans."
• Risks: High default rates, frequent rollovers, and a cycle of debt for consumers.
  • “It sort of becomes like a bad cycle where people have a hard time getting out of.” (C, 01:59)

2. Arguments For and Against Payday Loans

[02:11]

• Industry Defense:

  • There is a “definite need” among those without access to conventional credit such as credit cards (C, 02:17).
  • They often serve people with insufficient or impaired credit histories.

• Consumer Criticisms:

  • High interest rates and repeat borrowing trap consumers in cycles of debt.
  • Previous regulation aimed to limit repeated borrowing and curb predatory practices.

3. CFPB Rule Change

[02:39 – 03:36]

• Background:
  • Under Obama, the CFPB developed a comprehensive rule that would have made repeated, high-interest lending much harder.
    • "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." (C, 00:38 & 03:18)
  • The Trump administration rolled back this rule, making access to payday loans easier again.

4. Impact on Stakeholders

[03:36 – 04:44]

• Consumers:

  • Access remains largely unchanged; availability depends on state law.
  • Risk of debt cycles continues for vulnerable borrowers.

• Banks & Credit Unions:

  • The rollback creates regulatory clarity, which some banks welcome as it could allow them to offer loans in this market.

  • Recent joint guidance from the Federal Reserve and FDIC further clarifies what’s allowed.

  • “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.” (C, 04:29)

5. Reactions from Consumer Groups & Politicians

[04:44 – 05:22]

• Strong Opposition from Consumer Advocates:

  • They argue the rollback exposes vulnerable borrowers to predatory lending.

• Political Reactions:

  • Democrats and figures such as Joe Biden have criticized the CFPB rollback, especially amid the pandemic.
    • “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.” (C, 05:10)

6. Future of Payday Loan Regulation

[05:47 – 06:08]

• There’s uncertainty about whether more banks will reenter the payday loan market; most expect this will be limited for now.
• Future regulation could change significantly depending on which political party controls the CFPB after the November elections.
  • “Democrats have always been in favor of much tougher regulations on this industry. So depending on the outcome of the election in November, we could see significant changes in the policy governing this industry.” (C, 05:51)

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Notable Quotes & Memorable Moments

• On the scale of payday loan interest:

  • “Some of these loans could carry interest rates as high as 400% on an annual basis.” (C, 01:32)

• On the debt cycle trap:

  • “It sort of becomes like a bad cycle where people have a hard time getting out of.” (C, 01:59)

• On regulatory clarity for banks:

  • “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.” (C, 04:29)

• On political criticism amid the pandemic:

  • “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.” (C, 05:10)

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Timestamps for Key Segments

• 01:26: Explanation of payday loans and interest rates
• 01:45: Risks and cycle of debt
• 02:11: Industry defense of payday lending
• 02:39: Rollback of the Obama-era CFPB rule
• 03:36: Impacts on consumers, banks, and credit unions
• 04:44: Reaction from consumer groups and politicians
• 05:22: Likelihood of banks returning to payday lending
• 05:47: Potential future changes in regulation

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This summary covers the key content and perspectives discussed in the episode, providing an accessible overview to listeners or readers interested in current payday loan policy changes and debates.

Transcript

[A]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day. Washington Wise from Charles Schwab is an original podcast that unpacks the stories making news in Washington. [e-mail] Washingtonwise.

[B]

This is 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.

[C]

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.

[B]

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 and for the consumers who rely on them. First, Yuka, remind us what payday loans are and what their purpose is.

[C]

Sure. These loans are essentially high interest consumer loans that largely target lower to moderate income consumers. And some of these loans could carry interest rates as high as 400% on an annual basis.

[B]

And why are payday loans risky?

[C]

Essentially, the borrower must pay back these loans in two weeks, thus the name payday loans. But a lot of lenders end up not being able to pay them back. So they're going to reborrow the loans and interest rates start piling up. Sort of becomes like a bad cycle where people have a hard time getting out of.

[B]

What do payday lenders say in defending these kinds of loans?

[C]

Payday lenders say that there is definitely need for these short term loans. 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.

[B]

Okay, so talk about the changes the CFPB is making.

[C]

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 made it very difficult for payday lenders to extend these super high interest loans repeatedly to the same customers.

[B]

So what could the impact of this be both on banks and on consumers who might take out payday loans to borrow money?

[C]

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.

[B]

Well, what's been the reaction to the changes from other parties such as consumer groups and politicians?

[C]

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.

[B]

How likely are banks and other lenders to get back into the payday loan business?

[C]

We have yet to 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. But there are some banks who are interested in offering some types of consumer loans that are different from credit card loans.

[B]

Are we likely to see any other changes in how payday loans are regulated?

[C]

Democrats have always been in favor of much tougher regulations on this industry. So depending on the outcome of the election in November, we could see significant changes in the policy governing this industry.

[B]

Again, Wall Street Journal reporter Yuka Hayashi. Thanks, Yuka.

[C]

Thanks for having me.

[B]

And that's your money briefing. I'm Charlie Turner for the Wall Street Journal.

[A]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day. But what policy changes should investors be watching? Washington Wise is an original podcast from Charles Schwab that unpacks the stories making news in Washington right now and how they may affect your finances and portfolio. [e-mail] WashingtonWise.