Should the Installment Loan Industry Be More Tightly Regulated?

When it comes to the installment loan industry, there are many opinions. Those who have good credit, access to credit cards and middle class paychecks tend to view the industry as predatory and in need of major regulation. However, people who earn low wages, have poor credit and face limited borrowing options often view the installment loan industry as a needed business.

Regulation Coming Down the Pike

The Consumer Financial Protection Bureau, or CFPB, released a list of proposed regulations to eliminate what it refers to as “debt traps” by the lending industry. Proposed regulations include limiting the amount of interest that lenders can charge, decreasing the number of loans that borrowers can take out and forcing lenders to assess a borrower’s ability to repay a loan.

Richard Cordray, the director of CFPB, said, “Extending credit to people in a way that sets them up to fail and ensnares considerable numbers of them in extended debt traps is simply not responsible lending.” He went on to say, “It harms rather than helps consumers. It has deserved our close attention, and it now leads to a call for action.”

The Installment Loan Industry Pushes Back

According to the installment loan industry, the regulations proposed by the CFPB are heavy-handed, and once they’re in place, they could cause as much as 70 percent of loan businesses to close their doors. With so many closed down, millions of low income people would lose access to the only type of credit available to them.

One analysis of the proposed rules shows that once the regulations suggested by the CFPB become law, the industry would see an 82 percent revenue drop. This percentage is an amount that most small lenders would be unable to absorb. Another study completed by Deloitte Consulting came to the same conclusion. Deloitte released a statement about its results that said, “Our analysis of the potential rulemakings by the CFPB indicates that none of the Financial Service Centers of America, or FiSCA, members would remain economically viable, potentially leading to the closing of most, if not all stores, resulting in the loss of jobs for most, if not all employees.”

A Disinterested Agency

Because small businesses create more than 60 percent of private sector jobs in the United States, Congress added an addendum to the Dodd-Frank Act that requires the CFPB to assemble small business panels when they are considering regulating a particular sector. The CFPB created one such panel for the small loan industry when it was developing its list of regulation proposals.

One panel member said, “The entire process was an eye opener because the CFPB didn’t even seem to understand the differences in our product offerings like what are installment loans versus payday loans versus car title loans. They really needed to do a product-by-product analysis before they put out a proposed rule, and it didn’t seem like they had done that yet.”

Other types of lenders have also expressed concerns to Congress regarding the proposed regulations that the CFPB is considering. Auto loan lenders and even community bankers are worried that the additional rules could stymie their businesses and prevent everyday people from gaining access to the funds that they need.

Are Small Loan Lending Practices Unreasonable?

When a lender provides a short-term loan for $500 and charges a fee of $50 for it, the annual percentage rate for the loan is much higher than it is for other types of loans. However, if a person is paying this lending fee to avoid a late payment charge from his or her mortgage company, then the total cost may actually be less. In addition, when delinquencies begin affecting a person’s credit rating, the costs start to add up in the form of higher interest rates for every other kind of credit-based purchase that he or she makes.

The CFPB may also be missing another problem that is affecting many of the nation’s citizens, which is the lack of available credit for those with poor credit ratings and limited incomes. Often, people who make low wages fail to qualify for traditional credit cards that come with low annual percentage rates. This places them at a disadvantage when money emergencies arise.

Should Tighter Regulations Exist?

To help people avoid becoming mired in debt that they are unable to repay, the installment loan industry should verify a person’s ability to pay back a loan. However, the CFPB should not regulate the industry to the point where it is unable to help those who are in need of emergency funds. For additional information about whether the installment loan industry should be more tightly regulated, visit the Personal Money Store website.