June 3, 2016
Featured Story: Proposed Payday Lending Rule
The Consumer Financial Protection Bureau (CFPB) released its long-awaited proposal for regulating payday lending this week. The new rule would require lenders to verify consumers’ income and confirm that they are able to repay what they borrow. Additionally, the rule restricts repeated debit attempts by lenders on consumers’ accounts, which can induce heavy fees and make it more difficult for borrowers to emerge from debt. The proposed regulations are set to apply to payday loans, auto title loans, deposit advance products, and certain high-cost installment loans. Stacy Cowley reports in The New York Times that “...the proposed rules would radically reshape the market. Loan volume could fall at least 55 percent, according to the consumer agency’s estimates, and the $7 billion a year that lenders collect in fees would drop significantly.”
Nick Bourke of Pew Charitable Trusts, who has conducted extensive research on small-dollar loans, believes that the new rule falls short of what’s needed to curtail some of the most deleterious activities in which the industry engages. “[The proposal] would allow payday loans with 400 percent interest rates to flourish while locking out lower-cost loans from banks,” he argues. “To correct this problem, the CFPB should ensure that its final regulations include effective, pro-consumer product safety standards, such as limiting loan payments to 5 percent of a borrower’s paycheck. With a few strong fixes, the bureau could create a policy that protects millions of hardworking Americans.” Bourke’s not alone in his criticism. Others, too, have expressed disappointment at the narrow scope of the proposal. In American Banker, Richard Hunt notes that the rule doesn’t change stringent underwriting requirements banks must uphold, and, therefore, it doesn’t provide the appropriate incentives for mainstream financial institutions to offer these products, a move that researcher say would make small-dollar lending significantly less expensive for consumers.
Taking a step back from the new rule, The Atlantic’s Gillian B. White pointed out that “payday lending is, after all, an ugly and costly symptom of a much larger and more systemic problem—the financial disenfranchisement of America’s poor.” She offered a few solutions that would get more at the root of the problem, including postal banking.
News Highlights: Universal Basic Income and Welfare Reform
The Debate Over Universal Basic Income
Eduardo Porter’s asserts in The New York Times that universal basic income (UBI) would create a disincentive to work in addition to being difficult to fund. In response to Porter’s column, Vox’s Ezra Klein argues that, at this stage, we shouldn’t focus on the cost of UBI, but rather we ought to examine how the policy would align with how the nation views work. He asks whether we can respect people who live off a universal basic income, suggesting that if the answer is no, the policy may not be politically viable.
Also skeptical of the policy, Robert Greenstein from the Center for Budget and Policy Priorities voiced concerns that UBI might increase poverty, particularly if it’s adopted as a replacement for the current public assistance infrastructure: “If you take the dollars targeted on people in the bottom fifth or two-fifths of the population and convert them to universal payments to people all the way up the income scale, you’re redistributing income upward. That would increase poverty and inequality rather than reduce them.” In the New America Weekly, Alexander Holt rebuffed this idea, noting that UBI would actually be a tax policy. He believes that the wealthy would lose some of their tax benefits, which would be partially replaced by UBI, and thus benefits would be shifted down the economic ladder. Holt suggests that UBI may eventually make some public assistance programs obsolete, but that it shouldn’t be conflated with an immediate reduction of the welfare state. Matthew Yglesias of Vox, however, argued that UBI could be paid for by cutting “smaller means-tested welfare programs [like] LIHEAP, Section 8, [and] ‘Obama phones.’”
The Rising Cost of Basic Needs and the Decline of Welfare
The costs of basic needs—food, housing, healthcare—are rising, Bouree Lam of The Atlantic writes. As a result, “low-income households are devoting a greater share of their budget to basic needs compared with 30 years ago.” Unfortunately, tighter household budgets and less discretionary income may lead to poorer outcomes for children. Vox’s Julia Belluz writes that it may have contributed to the rise in childhood obesity. Supporting this idea, Vanessa Oddo of the Bloomberg School says: "We think that unemployment — resulting in decreased income — could render fruits and vegetables and other more healthful foods unaffordable.”
Despite rising the costs of necessities, the poverty threshold, and, thus, eligibility for public assistance, is still tied to the cost of basic food needs in the 1960s when the measure was originally established. And, those who do qualify for public assistance often face challenges accessing it, due to decisions made at the state level. Take Arizona for example, Slate’s Jordan Weissmann reports that Arizona has one of the highest child poverty rates in the country, and yet, its government recently decided to limit cash assistance through Temporary Assistance to Needy Families (TANF) to one year—the lowest time limit in the country. Other states use TANF dollars to pay for a range of services outside of the scope of welfare. Marketplace’s Krissy Clark explains that because TANF funds are provided to states in the form of block grants, states have significant flexibility to decide what they’re spent on. The State of Pennsylvania, for example, spends some of its money on “‘crisis pregnancy centers’ that counsel women against abortions,” and “in Michigan, welfare spending includes a program that gives private college scholarships to students from households with incomes as high as $250,000 or more.”
News in Brief: Entrepreneurship, Auto-Financing, Welfare, and More
- Patricia Hart writes in the New America Weekly that the ability to meaningfully engage in entrepreneurship may be more related to having economic advantages than it is to having an intrinsic capacity of risk.
- Uber developed a car-leasing program to allow people without cars to drive for Uber. But, Bloomberg’s Eric Newcomer and Olivia Zaleski report that auto-financing experts say the program’s “expensive, even predatory.”.
- In the wake of the 20th anniversary of welfare reform, Marketplace is running “The Uncertain Hour”, a series that explores the legacy of welfare reform.
- As college tuition continues to rise, it adds to the financial burden many low- and moderate-income students already face covering the costs of food, housing, and other essentials, Leon Mait reports for TalkPoverty.
- Governor Dannel P. Malloy of Connecticut signed a retirement security program bill that expands retirement options to nearly 600,000 workers in the State who are not offered a plan through their employers.
- Sarah Tully of Education Week, reports on San Francisco’s Kindergarten to College program and its efforts to increase account contributions.
- “[T]he best way to address retirement security is to continue reforming 401(k) plans and to expand Social Security—but only for low-income workers,” writes Kevin Drum in Mother Jones.
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