The Future of the Installment Loan Industry – Will Federal Regulation Kill It?

A year ago, the Consumer Financial Protection Bureau, or CFPB, took steps toward regulating the temporary loan industry. Ed Groshans, a financial specialist for Height Securities, said, “The CFPB made it extraordinarily clear that the path they’re going down is intended to eliminate the vast majority of payday lending.” The agency’s recent proposals will surely put a kink in the installment loan industry’s operations. Will federal regulation kill it? Time will provide an answer to this question, but so far, the industry has found creative ways to stay in business.

Getting Creative

Once states started regulating the installment loan industry, a number of companies found inventive ways around them. For instance, some made arrangements with Indian tribes since they aren’t subject to state laws. These agreements are often beneficial for the tribes because loan companies are helping them pay for education, medical and social services.

Other lenders are modifying their businesses to provide the services of pawnshops since the CFPB’s regulations won’t affect them. One temporary loan company now requires its customers to put up valuables like electronics or jewelry to receive urgent funds. The company confirmed that it changed its business model because the lending environment has become more regulatory.

Some companies are shifting their operations overseas. One former Texas-based installment loan company shut down all of its stores within the state and purchased more than 200 pawnshops in El Salvador, Mexico and Guatemala. Another lender is opening stores in China and Brazil.

Demand Exists

American Banker reports that the demand for installment loans is strong with more than half of the country’s consumers struggling with their credit scores. Estimates show that 56 percent of American consumers have subprime credit scores. When these people need emergency funds, they have few options. The Corporation for Enterprise Development researched the issue, and it found that one in five American households relies on unconventional loans.

Installment loan lending has been an available funding option for years, but the Internet and the cloud have made the loans more common. These technologies have also extended their availability. The increase of installment loan lending has brought more of the CFPB’s attention to the industry. Recently, the CFPB started soliciting complaints from consumers about alternate lending to determine if and how the industry was harming or helping them. The agency will likely use this data to develop additional regulations.

The CFPB’s Proposals

If the CFPB’s proposals go into effect, installment loan lenders will not be permitted to roll over a loan multiple times. Legislation will also prevent check holding, which is a practice that requires borrowers to write a post-dated check or give the company permission to withdraw funds automatically from a checking account.

When legislators put through the Dodd-Frank Act, they included a rider that prevented the CFPB from capping interest rates. However, the agency may have found a way around the rider by requiring lenders to make sure that borrowers can afford to pay back their loans with money to spare. Dennis Shaul, Community Financial Services Association of America’s chief executive officer, said, “The rules are a backdoor way to cap rates since lenders that charge less than 36 percent are exempt from many of them.”

Business Insider reports that the CFPB’s proposed regulations against the installment loan industry are along the lines of the ones that are already in place for banks and other financial institutions. However, one area of consideration involves supervision. Unlike other types of financial institutions, the temporary lending industry does not have a direct federal supervisor, but the Federal Trade Commission has oversight over it. If the CFPB winds up acting as the industry’s federal supervisor, then the organization would receive access to the data and operational details of these lenders. With this information, the agency could avoid using enforcement action against installment loan companies.

Michael Gordon, ex-senior counselor to CFPB Director Richard Cordray, said, “The power to examine companies is more subtle and often more powerful than filing lawsuits.” He went on to say, “If the bureau establishes authority in this area, marketplace lenders will need to quickly re-examine their regulatory compliance models and infrastructure.”

Predicting the Installment Loan Industry’s Future

The industry’s ability to adapt combined with the limitations that the Dodd-Frank Act put against the CFPB will likely allow installment loan companies to remain in business. However, if the industry becomes more accountable to the CFPB, then it will have to make changes. As long as people continue to turn to interim lenders for loans, the industry will continue to exist. To read more about the future of the installment loan industry, visit the