Installment Loans Under Fire by the CFPB Regulatory Guns

The Consumer Financial Protection Bureau, which is usually referred to as the CFPB, has turned its attention to installment loans, after making a series of controversial pronouncements and recommendations for payday lending reform. The organization has consistently cut through traditional checks and balances to expedite financial reform in the wake of 2008’s mortgage and banking crisis. The bureau has used questionable techniques and astonishing speed in its investigations against the payday loan industry and other financial institutions such as banks. , The bureau’s reforms of installment lending could affect a broader coalition of financial stakeholders than the relatively limited payday loan industry according to reform details that were publicized by Files.consumerfinance.gov.

CFPB’s Big Guns Target Installment Loans and Frighten Banks and Other Lenders

The proposed rules for installment loans would apply equally to payday loans, auto title loans and other high-interest installment loans. The new guidelines include:

  • All lenders–including banks and credit unions–would be subject to the CFPB’s requirements.
  • The rules apply equally to online lenders and supersede state regulations to the contrary.
  • Debt traps are to be eliminated by preventing reborrowing money in certain cases after paying off an installment loan.
  • All lenders would be required to determine each applicant’s ability to repay a loan,
  • The test would include installment payments over the financing period and any balloon payments due.
  • Interest rates for installment loans would be limited to 28 percent and a $20 processing fee or an all-inclusive rate of 36 percent APR.
  • Debt risks of taking out installment loans must be explained in plain language that any applicant could understand.

Mortgages and auto leases often feature balloon payments based on the concept that a person’s financial resources are expected to grow over time. It’s not clear how lenders can investigate this possibility under the CFPB’s new rules or whether the regulations would apply to auto leases.

Fewer Payday Loans Mean More Installment Loans Will Service the Shortfall

Installment lending has been viewed as a possible refuge for companies that can’t afford to offer payday loans under the CFPB’s interest-rate limits and other restrictions that were designed to put the industry out of business. Unfortunately, the CFPB doesn’t seem inclined to limit its attacks to payday lenders but has taken aim at a broad cross-section of financial interests. The installment loan regulations threaten banks, credit unions, automotive credit departments, mortgage companies and other financial companies according to a report posted at Americanbanker.com. Executive Vice-President Bill Himpler of the American Financial Services Association complains that the CFPB has lumped long-term credit products with payday loans despite more than 100 years of offering these products. “These are really two different markets – they’re like apples and oranges,” explained Himpler. “It would be akin to lumping a hamburger joint like McDonald’s and Morton’s Steakhouse into the same category just because both are restaurants.”

Persuading Resistant Consumers to Embrace Reform Takes Heavy Artillery

Despite opposition from the payday lending industry, consumers, Republicans and traditional banking interests, the CFPB has faced few limits to its power. The rules that the agency has proposed have moved about 3.5 times faster than regulations initiated within cabinet agencies according to an Americanactionforum.org report. Additionally, new CFPB rules and initiatives take only an average of 197 days from initial briefing in the Unified Agenda to final publication in the Federal Register. On some occasions, final rules have been released before notifying the public in the Unified Agenda that they were being considered. That kind of power takes heavy artillery to run roughshod over all political opposition and the nation’s system of checks and balances.

The CFPB has faced ever-increasing criticism about its techniques, practices and decisions that tend to run counter to what loan consumers actually want. The bureau’s tactics for investigating the financial industry have also drawn complaints. For example, it was recently discovered that the bureau had used undercover operations that are supposedly banned under the 1974 Privacy Act. The report, according to details posted on Mpamag.com, included using two “mystery shoppers” to apply for mortgages at BancorpSouth, which allegedly discriminated against African-American applicants. The discrimination was sufficiently proven that the company paid a $10.6 million settlement to the Justice Department and CFPB. That kind of money buys a lot of guns and ammunition for restructuring the way that installment loans work in the United States–regardless of whether customers, the banking industry, many politicians and the payday loan industry oppose these reforms. Find out more about CFPB regulations for installment loans at the PersonalMoneyStore.com.

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