On Thursday June 2, 2016, the CFPB proposed rules that would place stronger regulation on expensive, short-term consumer loans being generated principally by Payday and Auto Title lenders.  These rules are open for public and industry comment until September 14, 2016.  Once all comments have been received, they will be reviewed by the CFPB for possible changes or adjustments.  The expectation is that these rules will go into full effect on January 1, 2017.

While these rules are intended to keep consumers from falling into a vicious debt trap from which they can’t climb out, according to the CFPB’s research, they have created two unintended consequences – first for the consumers that use these products and second for the state financial regulators that have effectively kept these products from entering their states’ borders. 

Impact on Payday Customers

Millions of Americans rely on short-term loans to make payments on bills every week, particularly low income and underbanked consumers.  Some of these loans use next week’s paycheck as collateral or in other cases it may use the family automobile to support the loan.  While the rules are intended to reduce the cost of these short-term loans by eliminating harsh practices such as multiple debit attempts to collect fees from an underfunded consumer account, they also limit the profitability of lenders to offer these products in the first place. 

By not encouraging the industry’s development of a lower cost alternative prior to issuing these rules, the CFPB is pressuring the industry into an untenable position, from which it will likely be forced to remove these products from the market altogether.  This will likely strand the millions of American who rely on these products, potentially causing some consumers to go in default, on a deserted financial island.

Impact on States Currently Regulating Payday Loans

Currently payday loans with the typical triple digit interest rates (think 390%) are available in 32 states.  The remaining states have placed severe limits on the ability for Payday lenders to offer their products.  Most of these limits are in the form of usury interest rate (most in the 17% to 30% range) and origination fee caps.  The low interest rate and fee caps have severely limited the profitability of these products to their lenders, causing many to avoid these 18 states altogether.  For example, Arkansas has a 17% APR on all retail loans.  New York has a 25% APR cap and has declared high cost payday loans illegal on the Department of Financial Services website

By issuing Federal rules allowing Payday lenders to issue loans with 36% APRs, the CFPB has trumped state laws that require lenders to charge less.  This has caused an uproar among state financial regulators with some vowing to fight the CFPB’s attempt to introduce higher cost loans into their states.

Net Effect

As a result of the CFPB’s desire to regulate an expensive and risky financial product, it has created a no-win scenario for consumers, state regulators and the lending industry.  Instead of moving ahead as planned, the CFPB needs to take a step back and work with the financial industry and state regulators to foster the introduction of new, low-cost lending alternatives.  While protecting consumers is a laudable endeavor, it needs to be balanced with the addressing the apparent need consumers have for these products.

 

 

 

Author

About Michael Moeser

Michael is the JAVELIN’s Director of Payments. He advises clients on the rapidly changing payments industry. Michael is focused on tracking the evolution of the payments industry, covering specific areas such as person-to-person payments, U.S. and global EMV card migration, digital wallets, merchant acceptance of different payment forms, cross-border payments, real-time transactions, and digital payments.

Michael specializes in assisting clients in developing new payment products or repositioning existing services to capitalize on market opportunities, understanding how to market to particular consumer and small business market segments, and developing new corporate strategies that can transform an existing payments franchise.

Michael brings over 20 years of experience from the payments and consulting industries. Before joining JAVELIN, he led the international small business card portfolio at Visa, launching new and growing existing debit and credit card programs with banks and financial services companies across the globe. Previously, he was the Head of Competitive Intelligence at Capital One, a Payments Knowledge Expert at McKinsey’s Payments Practice, and the Head of Product Marketing at Ondot Systems, a Silicon Valley mobile card control startup. He has presented to audiences around the globe, primarily at Visa and McKinsey client and public audiences.

Michael holds a BBA in finance from the Ross School of Business at the University of Michigan and an MBA in marketing and entrepreneurship from the Kellstadt Graduate School of Business at DePaul University.

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