But what should millions of Americans do without a credit card or bank account?
Inot In 2017, the Federal Reserve estimated that one in four American families did not have enough savings to meet an unexpected expense of $ 400. Since the pandemic lockdowns, that number has increased as many Americans have been financially flattened.
For some people with bad credit, the answer has been to get an emergency loan. In the past, this often meant going to a storefront for a âpayday loanâ. These loans often gained a bad reputation because they charged high interest rates for a loan lasting only two to six weeks. So when the Consumer Financial Protection Bureau (CFPB) was created by President Obama in 2011, Congress gave him specific powers to regulate all short-term lenders.
But the growth of the internet means that many of these loans are moving to innovative online products that offer a longer repayment term and better terms. They typically offer loans between $ 1,500 and $ 10,000, with no collateral requirements or a potentially intimidating meeting with a loan officer.
But detractors of “payday loans” attribute all the alleged problems with such products to the online lending industry. Senator Elizabeth Warren, who was the creator of CFPB, says consumers struggle to understand new products, make poor choices as a result and need to be protected.
But the CFPB itself was not sure that more regulation was the solution. A CFPB working group January 2021 noted that it was dangerous to use âpatronizing stereotypesâ about consumers to stimulate regulation of the sector:
Recent research indicates that today’s âexpertsâ continue to underestimate the knowledge and capabilities of low-income and marginal consumers. The task force insists that any legislative or regulatory action taken to deny marginal consumers access to low-value loan products be based on sound economic theory and empirical evidence, and not on unfounded and condescending stereotypes about consumers who use these products.
In the last year of the Trump administration, the CFPB proposed a rule allowing financial institutions to once again offer creditworthy people easier access to loan products. Senator Warren quickly responded that “this new rule removes crucial protections for borrowers and makes it clear that the CFPB is not doing its job to protect consumers.” The CPFB may be on the verge of abolishing the Trump-era rule and effectively banning online lending.
Many minority business owners find all of this paternalistic and insulting. Business strategist Julio Rivera writes, at Washington times:
It is particularly infuriating for Ms Warren to make this argument about private lenders, as she had previously championed an initiative to allow the US Postal Service to offer similar loans specifically to pay rent, utilities, mortgage payments. and other unforeseen expenses. Bureaucratic government loans yes, private companies no? . . . Leftists often attempt to deny minorities and working-class households the opportunity to have the options and freedoms – in this case access to credit in emergencies – that progressive elites take for granted.
Democrats have always favored large financial institutions and their lending programs, and despised low-value consumer loans. But more than 7 million American households don’t have anyone with a bank account, and nearly half say it’s because they don’t have enough to meet minimum balance requirements. Many have relied on non-bank credit for their lending needs. For those with only a high school diploma, less than 40% of the loans they take come from banks.
The Right Reverend Council Nedd, Archbishop of the Episcopal Missionary Church, told me that liberal âloan saversâ who want to stop short-term loans âhave no plan to fix your leak or get your car fixed; not even a plan to create an economic environment so that you can have access to the same credit cards they take for granted. “
Nedd says that instead of regulating online lenders – who have used technology to cut costs and more easily match lenders with the best lending options – the government should focus on expanding economic opportunities, not on smother them.