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Understanding Non-Prime Borrowers and the Need to Regulate Small Dollar and “Payday” Loans

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Understanding Non-Prime Borrowers and the Need to Regulate Small Dollar and “Payday” Loans

Brookings Institution,

5 min read
5 take-aways
Audio & text

What's inside?

Consumer protection against predatory lending practices gives rise to new proposed regulations.


Editorial Rating

9

Qualities

  • Comprehensive
  • Analytical
  • Innovative

Recommendation

In June 2016, the US Consumer Financial Protection Bureau proposed a rule to govern the financial products that constitute “payday lending.” The rule, which could take effect in 2018, places stricter guidelines on vetting a customer’s ability to repay debt that often carries extortionate interest rates. In this comprehensive analysis, economist Aaron Klein explains in clear, plain language that federal regulation is necessary, given the dangers associated with predatory lending. getAbstract recommends his compelling report to financial professionals and policy makers.

Summary

Proponents of more stringent oversight of American “payday” lenders focus on the negative outcomes of payday loans for consumers, who often find themselves in “debt cycle traps.” Opponents of regulation stress the need for short-term credit for those who don’t qualify for traditional loans at lower interest rates. Regulators must begin by understanding the users of payday loans. While conventional wisdom holds that these customers are “unbanked,” borrowers must in fact maintain bank accounts to be eligible for payday loans. They also must provide evidence that they generate income. One in three users of payday loans owns a home, while one in...

About the Author

Aaron Klein is a fellow in economic studies at the Brookings Institution.


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