In Major Role Reversal, the Short Term Loans Industry Takes on the CFPB
Lenders who offer short term loans, including payday loans, cash advances and deferred deposits, became the subject of intense scrutiny from the Consumer Financial Protection Bureau almost as soon as the agency was officially created. Over the years, the CFPB has actively campaigned against the companies making these types of small-dollar loan products. Many of the press releases issued by the CFPB reported on the numerous lawsuits filed by the agency against check cashing services and other “fringe” providers of consumer financial services. In late November, lenders specializing in short term loans turned the tables and filed suit against the CFPB.
Industry Association Sues the CFPB in Attempt to Protect Short Term Loans
Short term loans are a key consumer credit product targeted by new rules written by the CFPB. The CFPB has always maintained that such loans mire borrowers in a cycle of debt by requiring unmanageable lump sum payment plans. The agency has also decried the annualized percentage rates on these relatively small loan amounts.
The Community Financial Services Association of America, or CFSA, is a trade association that has spent 18 years seeking to promote responsible lending practices while working to encourage regulations and laws that are fair and balanced. The CFSA argued unsuccessfully against the new regulations from the time that the CFPB released its first draft of proposed rules. Dennis Shaul, the CFSA’s CEO, wrote in one letter to the CFPB that the new rules overstepped the agency’s authority and that the rules were arbitrary, unnecessary and overreaching. On November 30, USA Today reported that Shaul has announced that the CFSA was “poised” to file a lawsuit challenging the new regulations.
What Are the CFSA’s Issues with the New Regulations?
Most lenders who offer short term loans deal with many customers with credit difficulties. These borrowers would be unable to qualify for a bank loan or traditional credit card, and many credit unions would be unable to help them as well. Therefore, most lenders do not base their decisions on just the borrower’s credit score. The borrower gives the lender a postdated check or the authority to collect the payment through an electronic draft of the borrower’s checking account.
• The new regulations require lenders to perform an underwriting process similar to what traditional banks perform. Lenders must verify that the borrower can repay the loan when it is due and still have sufficient funds to cover normal living expenses without needing another loan for at least 30 days. As noted in an article appearing on PaymentsJournal.com, the administrative costs are substantial; the costs are the same whether the loan is for 14 days or 48 months. This is one reason that most banks stopped making these types of loans many years ago.
The rule limits the number of covered loans that a borrower may be granted. Lenders may approve a loan of $500 or less without underwriting, but only under certain conditions. These conditions include verifying how many similar loans the borrower has already had during a rolling 12-month period.
• This provision essentially requires a lender to verify the borrower’s history with every other lender. The CFPB plans to accomplish this by requiring lenders to join and report to a service that will have a database of loan activities. However, the CFPB has been extremely vague on how many services will be available, who will control them, how much the service will cost lenders and virtually every other detail about the proposed services.
Although the CFSA has other issues with the new regulations, the above two problems alone are sufficient to drive many lenders out of business. This means that millions of Americans who rely on short-term loans to meet financial crises could find it difficult or impossible to obtain the help that they need. CFSA objects to regulations that could deny access to credit to borrowers who are often among those with the fewest options.
Is the Data Used by the CFPB Flawed?
Another issue that could arise during the course of the lawsuit is the accuracy of the data used by the CFPB to justify the new regulations. For example, when the CFPB released its proposed new rules in 2015, the agency asked for comments from consumers regarding their experience with payday lenders.
After the CFPB failed to release any statistics on the comments received, the CFSA was able to use the Freedom of Information Act to obtain the comments. According to the Washington Examiner, 12,308 of the 12,546 comments the CFPB received reflected positively on the payday lending industry. That the agency was not forthcoming about the comments and that it took an open records request to obtain them indicated that the agency was on an “ideological crusade,” according to Shaul.
What Does the CFSA Expect to Accomplish?
Whether the CFSA expects the court to overturn the new regulations is a matter for speculation. However, the CFPB is in turmoil over the departure of Richard Cordray — the only director that the agency had ever had — and the struggle that ensued when Trump appointed a new acting director to replace Cordray’s hand-picked successor. The CFPB might be willing to look at the rule with fresh eyes and consider alterations to the rule. Alternatively, the agency could simply decide that the time spent defending the regulations in court could be better spent on other issues.
Should Borrowers Be Concerned About the CFPB’s New Rules?
Although borrowers are justified in wondering whether short term loans will be available when needed, it is too early to bury the industry. If the new regulations stand, some lenders will certainly decide to close up shop and take their investments elsewhere. Other lenders will weather the storm, possibly by finding innovative ways to service their customers without violating the law.
As the battle could go on for another 18 months, consumers might want to follow the developments or begin researching alternatives to improve their financial situations. If so, a visit to the Personal Money Store could prove beneficial as there are many useful articles covering short term loans and other forms of consumer credit.