This past summer, the Consumer Financial Protection Bureau (CFPB) relaxed regulations on predatory payday loans and other high-interest-rate lending. A surprising move during a global pandemic recession, this ruling further endangers the financial health of some of America’s most vulnerable communities. Until these protections are restored, payday alternative loans (PAL) and other small dollar loans will remain important tools for America’s underbanked.
As we discussed in a recent blog article, the National Credit Union Administration (NCUA) recognizes the long, proud history credit unions have of helping their members maintain stability in challenging times. Clearly, with the new CFPB regulations, that challenge is still one credit unions are uniquely suited for. Although some larger banks are recognizing the opportunity with small dollar loan products of their own, those for-profit institutions have priorities other than helping their fellow Americans.
The Debt Trap
Debt traps happen when a borrower is unable to pay off one loan without having to take out another. High-interest loans like credit cards, short-term car loans and predatory payday loans are notorious debt traps. Payday loans especially prey on the most financially vulnerable. People unwittingly turn to high-interest payday loans out of desperation, thinking they’re helping themselves meet other financial obligations. Because of the short-term aspect of payday loans, however, their high interest rates often escape borrowers’ attention, and when payment comes due, it’s often tempting to take out another payday loan to pay off the first. That’s how the debt trap cycle begins, then quickly spins out of control.
Lower interest options like PALs offer credit union members an alternative to the debt trap. By keeping interest rates low, repayment is more manageable and thus less likely to snowball toward members’ financial ruin. The proliferation of predatory payday loan offices in lower income neighborhoods puts the financial health of our most vulnerable citizens at even higher risk. Congress has helped protect our servicemembers with the Military Lending Act (MLA), which caps interest rates at 36 percent. Congress has also tried extending its provisions to cover veterans and the general population. Unfortunately, House Resolution 5050, the Veterans and Consumers Fair Credit Act, has been stalled in committee for nearly a year. Now, with the CFPB relaxing regulations instead of making them more stringent, America’s underbanked are even further underprotected.
A Way Out
While some larger for-profit lending institutions have come to understand the need for loans that address the needs of at-risk populations, especially during a pandemic recession, those banks are still focused primarily on the short-term profit of their shareholders. While there are other options available, credit union products like PALs and PAL IIs remain the best tools for those truly in need. By relying on short-term, small dollar loans, credit unions are continuing their long, proud history of prioritizing the financial health of their members.
members achieve financial health.
As a purpose-driven fintech firm, QCash Financial is proud to offer help for small dollar lending programs. Our innovate fintech solutions automate small dollar loans (both fee- and incentive-based) and pre-approved loans and integrate seamlessly with the mobile banking platforms credit union members already use. By helping credit unions provide such products, we hope to keep underbanked Americans out of the cyclical debt trap of predatory high-interest payday loans. QCash Financial is driven to help credit unions ensure the financial health and stability of their members and the communities in which they live and place their stability above the profit margins of high-dollar investors.
For more about how our fully configurable, SaaS-based small dollar lending platform can benefit your members, just go to our QCash Financial Product Demo page and fill out the form!
Our blog features regular articles about the various financial issues surrounding the COVID-19 pandemic. You can also view our recent webinar series, COVID-19 Impact on the Financial Health of American Households, featuring CEO Ben Morales. For more information on QCash Financial’s small dollar lending or financial wellness services, please contact us.
