About a year ago, the CFPB, now called BCFP, abandoned the final version of its payday loan regulations. This followed an almost five-year process that included debates, discussions and a few frenzied shouting contests.
Basically, the new set of rules limited a lender’s ability to continuously charge fees on small loans by more tightly controlling the frequency and amount of customer borrowing.
The regulations were aimed at curbing the main complaints from consumer advocates: CFPB data showed that nearly a quarter of borrowers renewed their loans at least six times, resulting in total fees greater than the original loan amount.
“Lenders actually prefer clients who borrow repeatedly,” said Richard Cordray, then executive director of CFPB, after issuing the new regulations last year. “These protections provide the necessary reforms in a market where all too often lenders have succeeded by causing borrowers to fail.”
Complying with these new regulations meant significant changes in the payday lending process, including testing requirements to confirm a borrower’s ability to repay a loan on time while meeting day-to-day expenses. The rules also limit the number of loans that can be made in quick succession to three individual borrowers. Lenders who don’t want to deal with the more complex underwriting requirements can choose to offer loans under $ 500 or turn their payday loan products into installment loans.
Opponents of the payday loan applaud its success. Payday loan income fell from $ 9.2 billion in 2012 to $ 5.3 billion in 2017, and the number of payday storefronts fell from 24,043 in 2007 to 16,480, according to the CFPB.
Then came the Trump administration and the changing of the guard at CFPB.
The new land
About a month after the payday lending regulations were dropped, two changes occurred that changed the payday lending landscape, and the Office of the Comptroller of the Currency (OCC) reconsidered its position on banks and short-term, low-value loans.
At the beginning of November 2017, Richard Cordray left the CFPB and Mick Mulvaney became its interim director. In the two months that followed, Mulvaney announced (in January 2018) that the CFPB wanted to review the payday lending regulations with a view to their revision. Reports suggest the agency is moving ahead with overhauling these rules, with revisions to be released in February 2019. The new regulations are expected to come into effect in August 2019, although it remains to be seen how much or at how little they will resemble the current rules. unknown.
The OCC has also reviewed its position on banks and these consumer credit products. In 2013, the bureau strongly discouraged short-term lending as banks placed strict limits on what could be offered to customers based on their credit history.
These rules were formally repealed in 2017, then followed by new OCC guidelines earlier this year, actively encouraging banks to offer short-term, low-value, responsible lending to their customers. And at least one big bank seems to have been given enough encouragement. US Bank is rolling out – in a limited form, for account holders only – a short-term loan product with more favorable terms than those you are likely to encounter with the average payday lender.
The product is called Simple Loan, and as the name suggests, it’s designed to be pretty straightforward. Consumers can borrow any amount from $ 100 to $ 1,000 and then have to repay the loans in three installments over three months. The bank charges a fee of $ 12 for every $ 100 borrowed and deducts the payments from the consumer’s checking account through the automatic payment. The fee goes up to $ 15 for every $ 100 borrowed if a customer repays the loan outside of the automatic payment agreement. For example, a consumer who borrows $ 300 will pay $ 336 over three months.
And while it remains to be seen whether other FIs would want to follow in the footsteps of the US bank, there are several very good arguments to be made as to why they might want to do so, as the need and use of products from Short term loans can be much larger than you might otherwise think.
The new financial instability
Most people have a particular stereotype of the payday lender customer. They may be partially wrong.
There are clients with credit scores below 600 who have been excluded from the credit markets due to chronic defaults and borrow money from payday lenders, pawn shops, family and friends. This profile is closely linked to the “Shut Out” consumer profile described in the PYMNTS / Unifund Financial Invisibles report. These clients tend to be the closest to what most people imagine when they think of the short-term loan market.
This report also identified a very different client – one who on the surface appears to be more financially stable. We call them “second chances”.
Second chances are consumers who have experienced financial setbacks in the past, but are now re-entering the financial system, usually because they have the capacity to take on debt, according to the PYMNTS / Unifund report. On average, they earn over $ 60,000 per year, tend to own their own homes, have credit cards (two-thirds), have college degrees, and have bank accounts (over 90%).
Exclusions and second chances are among the borrowers reported by the report; the other two are the group No Worries and the group On the Edge. No Worries is the most financially secure personality of the mix: they make the most money per year, have the highest homeownership rate, have the highest education rate, and tend to use the credit liberally, but responsibly. They don’t tend to have overdue balances, have credit scores ranging from 700 to average, and have a very good track record of paying back what they buy and saving money.
In many ways, Second Chances looks the most like No Worries on paper, especially in terms of homeownership, education, income, and credit card use.
But under the hood, the image is not that strong. Over 70 percent admit to paying a late bill in the past year, and nearly 80 percent report living paycheck to paycheck despite their higher income. About 13% say they have used personal loans of some flavor in the past year, as well as payday loans, online lenders, MoneyGram, pawn shops, and RushCards. Pawn shops have proven to be a particular favorite in this group – 61 percent of Second Chances have used a pawnshop loan in the past year.
And, it seems, Second Chances knows that their second chance may be unfolding in a sub-optimal fashion, with a majority of the population expressing pessimism about their present and future status.
“The obvious conclusion to be drawn is that they are living beyond their means, or at least that their income does not keep up with their expenses,” noted Unifund Vice President Steve Ashbacher in an interview with Karen Webster . “The problem is, it just opens a gigantic box of worms – how is that possible?” How do some high income earners have expenses that exceed their income so quickly that they visit pawn shops in some cases to access funds? “
Where do we go from here
Proponents of the regulation say it provides important protection for highly vulnerable consumers who are likely to be drawn into an almost inevitable cycle of debt. Payday loans and other forms of short-term loans don’t help consumers – they just offer them a way to turn a short-term financial problem into a more costly one in the long term.
Opponents of regulation continue to argue that the CFPB rules are not intended to regulate payday loans, but to ban them through a regulatory structure that will force roughly eight in ten lenders to close their doors and deny people access to credit for the short term they need.
The typical term for a short term loan is 60 days and the average amount borrowed is less than $ 400. The 78% of borrowers who love and need the products, have no difficulty in using them for the long term, and use them responsibly would be sorry to see them disappear.
The answers are not easy – and will not become as the environment continues to evolve, and perhaps to include a wider range of customers.
But now, the discussion is far from over, as the latest version of the rules is currently under construction.
We will keep you posted.