CFPB faces dead-end payday loan scenario

The Consumer Financial Protection Bureau faces a difficult balancing act as it seeks to come up with a proposal to curb high-cost payday lending.

If the agency goes too far in restricting short-term payday loans and small dollars, there will be a huge backlash from payday lenders and on Capitol Hill, both Republicans and Democrats. But if the agency fails to put an end to the most abusive practices, consumer groups will view the first national payday lending standards as a failure.

One of the main concerns is what will replace payday lenders if federal regulations force many people to go out of business.

“One of the big problems is, if this industry shrinks, who is going to replace them?” said Gil Rudolph, co-chair of financial regulation and compliance practice at Greenberg Traurig. “There is going to be an inability of many consumers to meet their financial needs, especially in an emergency.”

If the CFPB sticks to a contour of its proposal released a year ago, as many as 60% or more of payday lenders could close their doors, said Dennis Shaul, chief executive of the Washington-based Community Financial Services Association of America, a trade association of foreground for short term lenders. .

If that happened, consumers would have nowhere to go for emergency funding, he said. Many would likely use unregulated online lenders.

“We are concerned that small operators are being driven out of business and small operators are where the most entrepreneurial and innovative ideas come from and where the smart cost cuts come from,” Shaul said.

But consumer groups fear that if the CFPB’s proposal does not go far enough, borrowers will continue to be harmed.

The 2015 preview was the first real public look at the CFPB’s approach, but the agency did not officially release the proposal at that time, as the payday loan rule is subject to federal law. requiring the office to first collect feedback from small businesses. The CFPB is expected to publish a plan by May or June. The Small Business Review Panel is expected to release its findings around the same time the CFPB releases its proposed rule.

Based on this pattern, the office sought to target specifically repeated cycles of borrowing. CFPB research found that 82% of payday loans are renewed or followed by another loan within 14 days. In addition, 75% of payday loan fees were generated by borrowers who took out more than 10 loans per year, according to the bureau’s analysis.

In broad terms, the CFPB said it was considering giving lenders two options: either to verify the borrower’s ability to repay a loan, or to comply with restrictions on how often a short-term loan can be made. renewed or reissued within a certain period. Lenders could opt for alternatives that allow less underwriting and documentation.

But Paul Leonard, the California director of the Center for Responsible Lending, said it was a mistake. He said the repayment capacity standard should apply to all loans.

“There shouldn’t be an option that doesn’t require the borrower’s ability to repay,” Leonard said. The CFPB is “concerned about trying to maintain a certain level of activity in a market where lenders have a strong presence and where many borrowers use payday loans.”

The plan would be CFPB’s first regulation under the authority given by the Dodd-Frank Act to prohibit unfair, deceptive or abusive acts or practices, commonly referred to as UDAAP. The regulations would cover payday loans, vehicle title loans, deposit advance products, and some high cost installment and indeterminate loans.

The agency is also concerned that lenders who collect automatic repayment from consumers’ bank accounts or paychecks, or those with liens on consumer vehicles, may have less incentive to carefully take out loans resulting in increased risk to consumers. consumers.

But the CFPB recognizes that its restrictions would result in “a reduction“in payday loan volume and income. To survive, lenders would likely have to restructure their business models. Many are likely to branch out into long-term installment loans with smaller periodic payments.

“It is likely that the number of monoline stores that could operate profitably in a given geographic market would decrease,” CFPB said. “The proposals under consideration could therefore lead to a substantial consolidation in the market for payday loans and short-term vehicle securities.”

Richard Horn, a former senior lawyer and special adviser to CFPB who now runs his own law firm, said the proposal could be so onerous that current lenders would not be able to comply.

“They’re creating a complex regime, and it’s so cumbersome with the timeframe and the necessary documentation that it’s going to be a game-changer” for the industry, he said.

Yet consumer groups say that instead of shutting down, many lenders will branch out into other products or consolidate branches that will end up serving more borrowers. In Colorado, for example, where state laws are among the strictest, lenders serve about 1,150 customers per store – double the amount in some other states, according to research by the Pew Charitable Trusts.

“There is an active shift towards very high cost installment loans that also have access to a borrower’s account, and this is where the payday loan industry is gearing up to go,” Leonard said.

Others said having fewer businesses would open up the market for other types of lenders to provide short-term credit. Lauren Saunders, associate director of the National Consumer Law Center, noted how some alternative lenders increased their market share in Montana after the state’s payday loan interest rate cap in 2010.

“We think the market will react and people will look for alternatives like credit unions,” Saunders said. “Just like during the mortgage crisis, instead of consumers getting a loan without a doc, they will look for a better alternative. ”

The repayment capability standard would require lenders to upgrade their technology to verify that a consumer can repay the loan and that they can meet major financial obligations and living expenses without borrowing again.

Small lenders who do not already have a registration system should invest in technology, train staff, and develop policies for using the system. The additional costs would further hurt the profitability of lenders, some lawyers said.

“Business costs will rise dramatically and a number of lenders will fail,” said Benjamin Diehl, attorney at Stroock & Stroock & Lavan in Los Angeles, who worked for many years in the California attorney general’s office. “There is a real question of the impact this will have on the availability of short-term loans.”

Shaul suggested that the rules could cause more business to go to “overseas-operating” companies that “are, without exception, downright sordid operators.” He said that for consumers in need of credit, companies like those in his trade group are the only prudent option.

“We have no reason to claim this product is good for everyone, it isn’t. But the demand is there and it cannot be denied,” Shaul said. “Our detractors do not want to admit that other than us, there are few official channels for consumers to seek an alternative to payday loans.”

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