In response to the Great Recession, enhanced government oversight and reporting requirements have tightened restrictions on the lending practices of the traditional financial community. For borrowers who can no longer access resources through these institutions, new, non-bank funding opportunities have emerged. A dedicated online lending community now offers short-term loans for borrowers who no longer qualify for traditional loans because of high credit risks. The online system allows these borrowers to apply for, receive and make payments towards “payday” loans or “deposit advances” using “Automated Clearing House” (ACH) technology.
An Evolving “Small Dollar” Lending Industry
Constantly evolving technology has made obtaining and maintaining these loans easier for thousands of Americans. The administrative squeeze on the traditional banking industry has eliminated many funding options for the millions who suffered significant financial losses through and after the Recession. The “small dollar” lending community has grown exponentially to fill those funding gaps, and ACH processing facilitates the loans at faster speeds than ever before possible.
However, because the industry is still relatively new, there are very few regulations in place to protect potentially vulnerable borrowers from potentially predatory lenders. Although loan amounts are usually very small (under $500), interest rates are uniformly higher than those imposed on traditional loans and repayment periods are usually much shorter, sometimes just a matter of weeks. When the borrowers default, lenders can overwhelm their accounts with collections demands and even cause the closure of those accounts, possibly eliminating the borrower’s opportunity to access credit again.
CFPB Seeks to Understand
Since 2013, the Consumer Financial Protection Board (CFPB) has been investigating the small dollar industry, with the apparent goal of setting rules to govern its practices. It issued a report in April of that year stating that data collected until that point were, “persuasive that further attention is warranted to protect consumers … and the CFPB expects to use its authorities to provide such protections.” There were no rules issued at that time.
In 2014, the agency issued another report, this time targeting the practice of “loan sequences” – a series of loans taken within 14 days of repayment of a prior loan. The Board identified repeated payday loan borrowing as “unfair” or “abusive” under current law. But still, no rules were issued.
Earlier this month, another report was published, this one detailing the usage patterns of payday loan borrowers and their lenders. The data contained in this report (collected in 2012) suggests that these borrowers:
- may pay excessive fines or fees for late payments (50 percent of them pay an average of $185 in penalties);
- have had their accounts (and access to financial services) closed due to problems with the loan, the ACH system or some other aspect of the process, and
- that many of these loans fail, as evidenced by repeat collections efforts that fail to collect the money owed.
Based on this data, the CFPB intends to issue rules governing these aspects of the industry later this Spring.
Industry Participants Not Happy
The Consumer Financial Services Group (Group), in its regular “CFPB Monitor” financial news blog, states that its review of the data doesn’t comport with the conclusions drawn by the CFPB. The Group also wonders why the Board is using and relying on the 2012 data because the processes in place back then are now obsolete.
The Community Financial Services Association, the small dollar lending industry association, asserts that its members provide short-term loans to over 19 million American families who need access to the funds to make ends meet. Their 2016 data shows that payday loan complaints are decreasing, down from 489 in 2015-Q1 to 420 in 2016-Q1.
It appears the industry will just have to wait to see if this is the year that the Board does, indeed, issue new payday loan rules.