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.





About Michael Moeser

Michael Moeser advises clients on improving the payments experience by anticipating customer needs amid the changing landscape of banking and retail shopping. His areas of expertise include cards, checks, P2P payments, B2C transactions, remittances, faster payments, digital commerce, mobile wallets, and merchant acquisition.

Before joining Javelin, Michael held executive positions at Visa, McKinsey, Capital One, and Ondot Systems. He has given presentations at conferences such as NACHA Payments, BAI Beacon, Card Forum, Power of Prepaid, and Mobile Payments. Michael has been quoted in many publications, including Forbes, the Wall Street Journal, Financial Times, American Banker, Chicago Tribune, Bloomberg, and Washington Post.

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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