Democrat’s Bill a Boon for Personal Installment Loans

Payday installment loans face piles of regulations

Payday installment loans face increased regulations, threatening a low-margin industry

Man picking up payday installment loans

Payday installment loans face increasing regulations

Personal installment loans and other forms of small-dollar credit are not known to be viewed favorably by most legislators who are Democrats. Especially in the aftermath of the financial crisis of 2008, the issues involving the short-term loan industry have tended to be divided along party lines. Democratic representatives and senators were more likely to support new regulations and additional oversight, while Republicans usually took the opposite view. In July 2017, Sen. Mark Warner — a Democrat from Virginia — introduced a bill that, according to HuffingtonPost.com, offers the payday lending industry a significant boost.

How the New Bill Could Help Lenders Offering Personal Installment Loans

“Protecting Consumers’ Access to Credit Act of 2017” is the official title of the bill introduced by Warner that could make personal installment loans more available. In essence, the bill would permit payday lenders to disregard state laws capping interest rates as long as the lender partners with a national bank. However, the actual process is a bit more complicated.

Companies offering personal installment loans must comply with rate caps in the state in which they are located as well as the rate caps in borrowers’ states. However, national banks are only required to comply with any rate caps present in their home state and are not required to comply with interest caps in the borrower’s state. This gives a national bank much more flexibility than a payday lender.

The way it typically works is that a payday lender asks a bank to issue a loan to a borrower on behalf of the lender. The payday lender then purchases the loan after the bank issues it. The bank earns a commission, but the lender can manage the loan.

Why Critics Object to the Proposed Legislation

Installment loans differ from traditional short-term, small-dollar credit products in one significant way — the repayment term. Whereas a traditional payday loan is repaid in a single payment that is typically due on the borrower’s next payday, installment loans are usually repaid through a series of monthly payments that are spread over as long as 12 months.

Critics worry that lenders could use the law to circumvent state usury laws. Back in 1833, the Supreme Court of the United States ruled that if a contract does not violate a usury law at the time of its inception, the contract remains valid even if there are usurious transactions on it at a later date. Furthermore, there are later precedents that affirm that the contract remains valid even if it is sold to a third party.

Other Democrats Are Reaching Across Party Lines to Propose Legislation Favorable to Payday Lenders

Warner’s bill is not the only piece of legislation that could benefit lenders who make installment loans as well as other types of small-dollar loans. In the House, six representatives — three Democrats and three Republicans — have introduced legislation that would repeal the CFPB’s rules on short-term loans, including traditional payday loans and installment loans. According to the Los Angeles Times, the group consists of Reps. Dennis Ross, Tom Graves, Steve Stivers, Alcee Hastings, Collin Peterson and Henry Cuellar.

The resolution hinges on the Congressional Review Act, which, prior to 2017, was only once used successfully to overturn a rule made by a government agency. Between January 2017 and June 2017, 14 rules were successfully overturned. The overturned rules were submitted by a range of agencies, including the Department of the Interior, the Social Security Administration, the Department of Labor, the Department of Education, the Securities and Exchange Commission and the Federal Communications Commission.

The 15th successful use of the Congressional Review Act was to overturn a rule submitted by the CFPB. The rule would have allowed banking customers to unite and participate in class-action lawsuits instead of having issues resolved according to the terms of the bank’s arbitration agreement. According to Congress.gov, the measure passed the House by 41 votes, but only passed the Senate by one vote — the vote cast by Vice President Mike Pence to break the 50-50 tie vote.

Can the Congressional Review Act Successfully Overturn the CFPB Rules?

Technically, the Congressional Review Act could be used to undo every provision of the new CFPB regulations. Congress has 60 in-session days to disapprove a rule, and if the rule is disapproved, the law prohibits the agency from submitting a rule that is substantially the same. Disapprovals require only a simple majority in both the House and the Senate, after which President Trump will need to sign the resolution.

However, the narrow margin by which the resolution to disapprove the arbitration clause passed in the Senate may signal that it will be difficult to obtain the necessary votes to pass many disapprovals. All 50 affirmative votes were cast by Republicans, but two Republicans voted against the resolution. Therefore, although it is possible that Congress could disapprove numerous CFPB rules, it is more likely that the Republicans will prefer to choose their battles carefully and use the Congressional Review Act sparingly.

Warner’s Bill Does Not Rely on the CRA

Fortunately for lenders making payday loans, the bill introduced by Sen. Mark Warner is a new piece of legislation that does not involve the Congressional Review Act. The bill has also garnered some support from Democrats, including Rep. Gwen Moore, Sen. Gary Peters and Rep. Greg Meeks. At this point, Warner’s bill appears to have a good chance of passing in both the Senate and the House. However, no one should attempt to count the votes before they are cast; the bill could still be defeated.

Will Payday Installment Loans Survive?

Regardless of what happens with Warner’s bill or attempts to use the CRA to disapprove the CFPB’s new rules, payday installment loans are likely to survive. Although installment loans are subject to many of the same requirements as their payday loan cousins, the rules are slightly different for certain types of installment loans. Many lenders are expected to transition to these types of loans and reduce the number of loans they make that require lump sum or balloon payments.

The consumer-credit market continues to change, so borrowers need to stay abreast of all issues related to personal finance. If you would like to learn more, visit the Personal Money Store to find many helpful articles about installment loans, payday loans and other credit products.

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