In a twist of irony, or something like it, a recent proposal from the Consumer Financial Protection Bureau would target so-called payday lenders, requiring them in some cases to perform an ability-to-repay analysis on potential borrowers.
The bureau’s proposed rules fall into either a preventative or protective camp, depending on which path a payday lender wants to follow. If a lender chooses to follow the preventative path, he would have to essentially do an ability-to-repay analysis of the borrower – not totally dissimilar to the rules banks must follow to make a qualified mortgage.
And as Sabrina Rose-Smith, a partner in Goodwin Procter’s consumer financial services practice, points out, “Payday loans are, by nature, something that you can get relatively quickly and without a lot of hassle if you have an income stream.”
“Most people are not going to want to go through the process of getting a mortgage just to get a $400 loan,” she said.
Rose-Smith said she expects to see more lenders follow the bureau’s protective guidelines. Under those rules, a small-dollar lender would be exempted from conducting an ability-to-repay analysis in lieu of complying with certain limits on the loan itself, which restrict how much a customer may borrow, cap rollovers at two for a total of three loans, and requiring lenders to offer borrowers affordable repayment plans.
That more or less mirrors the approach many states have followed, although as Rose-Smith points out, the bureau’s rules will often supersede state laws that are more lenient on payday lenders.
The CFPB’s rules are not likely to override existing consumer protection rules in Massachusetts, however. Payday lending isn’t exactly illegal in the Bay State, but small-dollar lenders (defined as those in the business of making loans under $6,000 at interest rates greater than 12 percent) are required to obtain a small loan company license from the Division of Banks. They’re also capped on the annual interest rates they can charge (23 percent) and the annual administrative fee they can charge ($20).
As to Internet-based lenders with no physical presence in the commonwealth, the division is absolutely clear: They still need a license.
If the aim is to protect consumers against what the state sees as predatory lenders (and it is), then Massachusetts’ model appears to be working. A representative from Attorney General Maura Healey’s office said their office had actually noticed a decline in consumer complaints over payday loans in recent years, though she added that the attorney general’s office did plan to file comments with the CFPB on its proposed rules.
“Our office is concerned about short-term lenders who take advantage of Massachusetts residents by violating state laws and regulations regarding licensing and interest rates, and [we] will continue to investigate and prosecute these types of abusive and predatory business practices. We support CFPB’s push for tougher payday lending rules to further protect consumers,” spokesperson Jillian Fennimore told Banker & Tradesman by email.
Concerns Over Clamping Down
Some worry that imposing tough restrictions on payday lenders could actually wind up hurting already vulnerable populations by choking off their access to easy credit. It’s not just the usual suspects raising potential objections, however.
In 2007, the Federal Reserve Bank of New York found that consumers in Georgia and North Carolina actually fared worse after those states eliminated payday lending altogether. Georgians bounced more checks after the ban, complained more about lenders and debt collectors and were more likely to file for Chapter 7 bankruptcy.
Those bounced check fees added up, too. At around $30 per item and 1.2 million more returned checks per year, that means that after the ban on payday lending was enacted, Georgia residents paid about an extra $36 million per year to cover bounced checks. North Carolina residents fared similarly, the report said.
That report even went a step further, citing former FDIC chair Sheila Bair as saying that those fees essentially de-incentivized banks and credit unions from offering payday loans that could be cheaper for consumers, an alternative commonly proposed by opponents to payday lending.
More recently, researchers Dr. Howard Beales of George Washington School of Business and Dr. Anand Goel of Navigant Economics reached a similar conclusion – that unbanked and underbanked consumers would likely be hurt by regulations on the payday loan industry – after examining a data set that included more than 1.02 million payday loans.
“Efforts to regulate small-dollar loans should not be motivated solely by a desire to make them look more like other credit products,” Goel said in a statement accompanying the report. “Differentiated credit products allow consumers the freedom to choose products that best serve their needs.”
