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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

Aaron Klein
Brookings Institution, 2016
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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.

Take-Aways

  • Stricter governance of the United States’ “payday lending” market seeks to protect consumers from “debt cycle traps.”
  • Payday lenders focus on the “nonprime” borrower, who takes on high interest rate loans either because of illiquidity or insolvency issues.
  • While conventional wisdom holds that nonprime customers are “unbanked,” borrowers in fact must maintain bank accounts to be eligible for payday loans.

About the Author

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

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