But what should millions of Americans without credit cards or bank accounts do?
In 2017, the Federal Reserve estimated that one in four American families did not have enough savings to take care of an unexpected $400 expense. Since the pandemic lockdowns, that number has grown, as many Americans have been financially flattened.
For some people with poor credit ratings, the answer has been to get an emergency loan. In the past, that has often meant going to a storefront for a “payday loan.” Such loans often developed a negative reputation because they charged high interest rates for a loan only two to six weeks in length. So when the Consumer Financial Protection Bureau (CFPB) was created by President Obama in 2011, Congress gave it specific powers to regulate all short-term lenders.
But the growth of the Internet has meant that many of these loans are shifting to innovative online products that offer a longer repayment term and better terms. They typically offer loans of between $1,500 and $10,000, with no requirement for collateral or a potentially intimidating meeting with a loan officer.
But critics of “payday loans” blame all the alleged problems of such products on the online loan industry. Senator Elizabeth Warren, who was the creator of the CFPB, says consumers have difficulty in understanding the new products, make poor choices as a result, and must be protected.
But the CFPB itself wasn’t sure whether more regulation was the answer. A January 2021 CFPB task force noted that it was dangerous to use “condescending stereotypes” of consumers to drive regulation of the industry:
Recent research indicates that today’s “experts” continue to underestimate the knowledge and capability of lower-income and marginal consumers. The Taskforce urges that any legislative or regulatory steps taken to deprive marginal consumers of access to small-dollar loan products be grounded in sound economic theory and empirical evidence and not in unfounded and condescending stereotypes of the consumers who use these products.
In the last year of the Trump administration, the CFPB proposed a rule to allow financial institutions to once again offer creditworthy individuals easier access to loan products. Senator Warren quickly responded that “this new rule eliminates 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 scrapping the Trump-era rule and effectively banning online lending.
Many minority business owners find all this paternalistic and insulting. Business strategist Julio Rivera writes, at the Washington Times:
It is particularly galling for Ms. Warren to make this argument about private lenders as previously she championed an initiative to allow the U.S. Postal Service to offer similar loans specifically to pay for rent, utilities, mortgage payments and other unforeseen expenses. Bureaucratic government loans yes, private companies no? . . . Leftists often attempt to disallow minorities and working-class households the ability to have the options and freedoms — in this case access to credit when emergencies occur — that elite progressives take for granted.
Democrats have always favored big financial institutions and their lending programs and looked down on small-dollar consumer lending. But more than 7 million American homes have no one 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 nonbank credit for their loan needs. For those with only a high-school degree, fewer than 40 percent of the loans they take out come from banks.
The Right Reverend Council Nedd, archbishop of the Episcopal Missionary Church, told me that liberal “loan saviors” who want to shut down short-term lending “have no plan for actually fixing your leak or getting your car repaired; not even a plan for creating an economic environment so that you can have access to the very credit cards that they take for granted.”
Nedd says that instead of regulating online lenders — who have used technology to lower costs and more readily match lenders to the best loan options — the government should focus on expanding economic opportunity, not snuffing it out.