More than 50 million Americans each year seek access to short-term, small dollar credit.  Generally speaking, these are loans with a maturity measured in weeks or months, for amounts less than $5,000.  This borrowing is used to fund just about everything that other borrowing funds, though on a smaller scale, and more immediately.

Even houses?  Yes.  Not to buy them, but to fix them.  Hole in your roof?  When do you want to fix it?  Is there an answer other than, “Right away!”?  To buy a car?  Maybe, but more likely to fix one.  Failed your state safety inspection?  Waiting for the next pay check to get the brakes fixed may not be an optimal solution.

Where do you go to get the money?  Today, most people put it on their credit card.  Some put it on their debit card (and if there is not enough money in the account, they take advantage of their overdraft options).  But millions of people do not have (for many reasons) credit cards.  Where do they go?  Most banks will make accommodation loans for known customers (though it is tough for a bank to cover its costs on one-off loans for small amounts for short periods of time), but these are exceptional, not regular credit programs. 

Not a few borrowers go to nonbank lenders like payday lenders, auto title lenders, and pawn shops.  The people at the Bureau of Consumer Financial Protection do not like that.  They think that these lenders abuse their customers. 

The Bureau does not answer the question, Why would these people sign up for voluntary abuse, if abuse it is?  Instead, the Consumer Bureau believes that consumers should be protected from themselves.  The Bureau has offered a proposed rule that will effectively take these options off of the table. 

The Bureau offers alternatives, but they are so laced with conditions and regulatory risk that lenders will not likely take them up.  If borrower demand for small dollar credit does not go away—if stuff does not stop happening to people causing them to need immediate access to small amounts of credit—where will these people go?  To the “informal” sources of funds.  Let your imagination wander as to what those might be.

Here is the link to the Bureau’s page announcing and explaining its proposal (Warning:  the proposal is more than 1300 pages).  As you review the plan, ask yourself the important question:  Whom does this really regulate, lenders or customers?  You have 90 days to give the Bureau your answer.