Nearly five years after the entry of the FCA into the UK payday lending industry, the same will soon be happening in the US. What will the new payday loan regulations mean to the American people?
We take an in-depth look at the issue of the US payday loan regulations with information about:
Payday Loan Regulations for the US
In October 2017 the CFPB (Consumer Financial Protection Bureau) announced that regulation for the billion-dollar US payday loan industry would come into effect from 2019. Before explaining the challenges facing this proposed regulation and the reasons for the delay, let’s examine what the regulation actually entails.
What Are the New Payday Loan Regulations for the US Payday Loan Industry?
Federal regulation for the US payday loan industry comes after five years of research by the consumer finance watchdog CFPB. A single short-term loan of $500 will be allowed without restrictions. However, this is on condition that the borrower has no other outstanding loans. For larger and more frequent instant payday loans from direct lenders and brokers, there are stricter underwriting rules. This means that the lender must check that the borrower can afford the repayments. Also, they will cap the number of loans made to a customer.
Richard Cordray, the Director of the Bureau, believes that this regulation will prevent a cycle of debt. It leads to borrowers repeatedly re-borrowing and paying interest rates of 300%.
The payday loan industry has always been the focus of regulation, but this has been a state- rather than federal level. Also, the level of regulation can vary enormously from state to state.
Why the Delay in US Payday Loan Regulation?
Like any regulation covering any industry, the delay to its implementation gives payday lenders the chance to make changes to their business models. If necessary, they may wish to shut up shop and leave the sector completely. Some people wonder whether this breathing space will give the industry time to regroup and ensure that the rules are never put into effect. What exactly could they do?
Challenging the New Payday Loans Rules and Regulations
With large and powerful lobbying groups, the instant approval payday loans industry has vowed to fight this regulation. One of the possible ways to appeal against these new rules is to start a lawsuit on the grounds that the power of the CFPB is unconstitutional.
Another way they could challenge the proposed regulation is for Republican lawmakers to nullify it in Congress under a Congressional Review Act within 60 legislative days. They could give the reason that CFPB regulations are too onerous. However, some political analysts believe that they would struggle to get the necessary votes.
Why are Payday Loan Companies Against Regulation?
The loss of revenue is the central reason why US payday lenders are against regulation. The industry is worth an estimated $46 billion a year collecting additional fees of $7 billion. The CFPB predicts that their revenues will fall by two-thirds while the industry itself says it will be nearer the 80% mark. The industry also says that 18,000 payday loan stores will go out of business creating mass unemployment. Their example is that the income of an average store will plummet from making an annual profit of $37,000 to being $28,000 in the red.
As for the estimated 30 million borrowers, lenders claim that they will be left in a ‘credit desert’. With low credit scores blocking their access to mainline banks, they will be forced to resort to the unregulated fast loan industry (or loan sharks), use overseas credit facilities or just bounce cheques. As regards access to credit for those who need the convenience of a short-term loan, what provisions have the CFPB made for these borrowers?
Filling the Gap Created by the Shrinkage in the Payday Loan Market
To ensure that consumers who need a short-term quick loan aren’t blocked access to credit, the CFPB has exempted both community banks and credit unions from the regulation.
This move was applauded by the consumer finance project, the Pew Charitable Trust. They said these loans would be up to 6 times cheaper than payday loans. To further ease this transition period, the Office of the Comptroller of the Currency announced that they’d lifted the restrictions on banks making small-dollar loans. Although praising the move, the Community Bankers Association said that only the smallest banks would qualify for an exemption. It also needed to be opened up even more.
Once the regulation for the US payday loan market becomes law, there will be a massive upheaval in the industry across the whole of the country. Some would say that this reform is long overdue.
What changes will happen to revenue and the make-up of the industry remain to be seen. The UK payday loan industry shows at first-hand how the experts often get things completely wrong. In light of FCA regulations, it was predicted that the UK industry would be reduced to a handful of lenders and that loan sharking would become more common. Neither prediction came true. Instead, payday lenders adapted their business models, and other forms of high-interest credit jumped into the gap.
We’ll just have to wait until 2019-20 to see what will happen in the US.