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Federal Regulation       Financial Services       Big Government

Proposed CFPB Regulations Will Eliminate Small-Dollar 'Payday' Loan Industry?

By Dean Chambers

Federal regulations from the CFPB could eliminate the payday loan industry

Are the new regulations on small-dollar “payday” loans proposed by the Consumer Financial Protection Bureau (CFPB) going improve the products for consumers or put this industry out of business? The question is raised that the regulations could eliminate the industry, the Washington Post reports. Critics of the proposed regulations claims many small-dollar lenders will be forced out of business.

The CFPB held a hearing at the Country Music Hall of Fame in Nashville, Tenn. on the small-dollar lending industry and the new proposed regulations. The message of critics of the proposed regulations, the Washington Post reported, “Destroying this form of credit will means more late mortgage payments, more foregone medical procedures, more missed days of work when someone couldn't pay for gas.”

While CFPB Director Richard Cordray, a Democrat who was a State Representative and losing candidate for Congress in Ohio appointed by President Barack Obama to head the agency, states the proposed regulations will make the industry safer for consumers, critics says the proposed CFPB regulations could eliminate the small-dollar lending industry.

Consumers of small-dollar lenders typically find themselves needing $100 or $200 to pay a bill or cover an expense when they are short on money until their next paycheck. While many would cover that expense with a credit card, or a cash-advance from a credit card, those who don't have credit cards turn to small-dollar lenders to take out what are commonly called “payday” loans where they borrow less than $500 in most instances by writing a check to be deposited after their next payday. Typically a consumer might borrow $200 and pay back to the small-dollar lender about $230 approximately two weeks later. If one is facing the choice of paying the electric company $200 or having the electricity shut off, one would prefer the $30 cost of borrowing the money to pay the bill preferable to going two weeks without electricity, for instance.

The CFPB wants to limit the annual percentage rates on such loans to 36 percent APR, a rated far less than typically paid to small-dollar lenders. The example above of a “payday” loan being borrowed for two weeks at the interest rate of $15 per $100 borrowed, if borrowed over a period of a year would result in 26 payments of $15 finance charge on that $100, or $390 total paid. That calculates to an APR of 390 percent.

"The truth of the matter is that no lender can operate in a market with those aggressive price caps or restrictions," Amy Cantu, a spokeswoman for the Consumer Financial Services Association of America (CFSAA), which represents a majority of payday lenders, told the Washington Post. "We can't pay our employees, we can't pay our utilities, we can't pay our rent. Regulated, licensed entities are effectively banned." The Association also noted its members' data was not included in the CFPB report.

The Pew Charitable Trusts has studied the small-dollar lending industry for years, and pointed out capping the industry rates on “payday” loans by the CFPB is not only prohibited by the Dodd-Frank Act, it is also not the only remedy.

Referring to an “average” payday loan of $430, Nick Bourke of the Pew Charitable Trust stated, “The core problem here is this lump-sum payday loan that takes 36 percent of their paycheck. The policy response now has to be either eliminate that product altogether, or require it to be a more affordable installment loans.”

Bourke favors the latter option: Require lenders to take into account a borrower's ability to repay the loan over a longer period of time, with monthly payments not to exceed 5 percent of a customer's income. That, along with other fixes like making sure that fees are assessed across the life of the loan rather than up front, would decrease the likelihood that borrowers would need to take out new loans just to pay off the old ones,” the Washington Post reported.

Pew studied the results of regulations that required such installment payments on small-dollar loans in Colorado, and found that such regulations caused more than half of the licensed small-dollar lenders closed their businesses, and the number of consumers of small-dollar loans declined from just over 279,000 to approximately 238,000 after conventional payday loans were required to be issued as payday installment loans. The average number of borrowers per small-dollar loan store increased from 554 to just over 1000.

The other result of the proposed CFPB regulations highlighted in the Pew study is the entrance of traditional banks in the small-dollar loan industry, who have the resources to offer payday loan products at lower interest rates that could lead to many smaller businesses in the industry not being able to survive. The entrance of large national banks like Bank of America and Chase could put many small-dollar lenders out of business.

CFPB is seeking to regulate what has been traditionally a state-regulated $46 billion industry, the Wall Street Journal reports. Critics of the “payday” loans say that consumers must re-borrow the principle several times and pay typically 200 to 500 percent interest rates annually on the loans, as found by the Pew study, and that it often leads to the need to take additional loans to pay interest on them.

Small-dollar lenders who offer such payday loans say regulations that eliminate such loans will leave some consumers with no other options to borrow needed money. Regulations like those proposed by the CFPB, Jamie Fulmer who represents Advance American, the nation's largest small-dollar lender, says would, “eliminate a viable credit option and drive them to miss bill payments, use overdraft programs, or turn to dangerous, illegally operating lenders.”

The regulations could also threaten loan products offered by the nation's credit unions, points out Debbie Matz, Chairman of the board of the National Credit Union Administration (NCUA) that regulates and charters credit unions, as reported in Credit Union Times.

We have done the math and found that when fees are included, many credit unions’ short-term loans would exceed the proposed 36% military APR limit,” Matz said. “Unfortunately, this proposed rule would deny access to affordable alternatives to predatory payday loans.”

Matz said her agency is requesting modification of the proposed CFPB rules to prevent the regulations from prohibiting affordable credit union loans that are an alternative to payday loans for many customers.

The city of El Paso, Texas has enacted limits on “payday” loans, the Inquisitr reported last year. The limits include allowing consumers of the loans to only borrow as much as 20 percent of their monthly income as well requiring the small-dollar lenders to provides customers with credit counseling information. Furthermore, the loans can only be renewed three times.

As many as 68 million citizens are not served by traditional banks and credit products, the FDIC has reported. Many of those customers find their financial needs met by the small-dollar lending industry might lose access to credit if regulations eliminate the “payday” loan industry.

Some Democrats in Congress are also opposing the proposed CFPB regulations, including Debbie Wasserman Schultz (DNC Chairwoman), Alcee L. Hastings and Corrine Brown, all from Florida, The Washington Times reported. The three members of Congress criticize the regulations because they eliminate an industry that serves the banking needs of minorities, the poor and the elderly. The entire Congressional delegation from Florida (both Democrats and Republicans), signed a letter to the CFPB asking them to consider the regulations of the small-dollar lending industry passed at the state level in Florida.

More than 33 million households lack sufficient access to traditional banking services, according to the Federal Deposit Insurance Corporation. This is mainly because banks — due to their compliance regulations — don’t issue loans to people with a high credit risk after evaluating their credit history, the Washington Times reported.

Those who represent the industry, such as the CFSAA, are suggesting regulations that codify best practices should be implemented instead of those that could eliminates many small-dollar lenders destroy the entire industry. But words stated by the director of CFPB suggest that is not the goal of the proposed regulations.

In remarks he made in Nashville, reported by the Washington Post, Corday said, “The business model of the payday industry depends on people becoming stuck in these loans for the long term, since almost half their business comes from people who are basically paying high-cost rent on the amount of their original loan. Loan products which routinely lead consumers into debt traps should have no place in their lives.”



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Posted September 29, 2015 at 8:48 PM