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Millions of Americans across the country struggle with unexpected financial hardships daily and are oftentimes shut out of the traditional financial services market, unable to obtain credit from banks or credit unions. Tens of millions of families are estimated to be living paycheck-to-paycheck, and a recent Federal Reserve report found that nearly half of the people surveyed said they could not cover a hypothetical emergency expense of $400. Additionally, the CFPB's first national survey on financial well-being found that more than 40% of U.S. adults struggle to make ends meet.
To get by and provide for themselves or their families, these hardworking Americans often turn to small-dollar loans. For years, millions of Americans have relied on small-dollar loans to weather unexpected expenses such as medical bills or car repairs. In fact, 94% of small-dollar loan borrowers consider obtaining such loans to be a sensible decision when they are faced with unexpected expenses. Small-dollar loans are often the least expensive option for consumers, particularly compared to bank fees – including overdraft protection and bounced checks – or unregulated offshore internet loans and penalties for late bill payments.
When access to small-dollar loans is restricted, consumers are harmed. Rigorous academic studies have shown that when small-dollar loans are removed as an option, consumers bounced more checks, complained more about lenders and debt collectors, and filed for Chapter 7 bankruptcy at higher rates. In order to obtain the credit they need, customers often turn to illegal, offshore, or otherwise unregulated lenders, which increases their risk.
Opinion research has shown that most small-dollar loan customers are from middle-income, educated, working families. An independent survey showed that 94% of borrowers considered obtaining a small-dollar loan to be a sensible decision when they are faced with unexpected expenses and 60% of borrowers believe small-dollar loans are fairly priced for the value they provide. Of the customers surveyed, 75% said they were likely to recommend small-dollar loans to friends and family.
Not only do small-dollar loan customers value their access to credit, but they are also acutely aware of burdensome regulations that will harm their financial well-being. A national survey found that more than two-thirds (69%) of small-dollar loan users oppose government restrictions on such loans, agreeing that “you should be able to decide how often you take out a short-term loan and not be limited by government restrictions."
Millions of Americans from all different backgrounds use small-dollar loans to manage unexpected financial hardships. According to a recent FDIC survey, approximately 20% of US households – nearly 25 million people – were underbanked in 2015 and obtained credit through alternative financial services such as small-dollar loans. What’s more, a 2015 study found an estimated 47% of US households say they spend all of their income, go into debt, or dip into savings to meet their annual expenses. The analysis found that if a typical middle-class household would exhaust their available savings within 21 days if it had to weather a period of joblessness without any income.
The small-dollar credit industry is licensed and regulated in more than 36 states, where laws govern the terms of the transaction and provide consumer protections. All CFSA members are state licensed and regulated, and must adhere to CFSA’s industry leading Best Practices. Further description of thes Best Practices can be found here.
State regulators ensure that lenders follow all laws and regulations that govern the small-dollar loan services through rigorous monitoring and enforcement activity. States provide the primary regulatory framework under which small-dollar credit is offered, and certain federal laws and regulations also apply to small-dollar lenders to protect consumers.
At the federal level, lenders must comply with disclosures required by the Truth in Lending Act (TILA) and are subject to other laws that prohibit misleading advertising, protect against discriminatory lending practices, and proscribe unfair credit practices. The Consumer Financial Protection Bureau (CFPB) has primary oversight over the small-dollar lending space and ensures compliance with federal laws. The Federal Trade Commission (FTC) oversees certain aspects of the marketplace as well.