Installment Loans Industry Under Scrutiny by Consumer Financial Protection Bureau

Every year, millions of Americans take out installment loans and payday loans to get through short-lived financial crises. These individuals typically live paycheck to paycheck. Without access to these kinds of loans, they would have nowhere to turn when their cars unexpectedly need repairs, when they’re short on their rent or mortgage payments or when they face various other financial issues. Despite the urgent need for and overall popularity of these services, the Consumer Financial Protection Bureau (CFPB) is seeking to place severe restrictions on the industry.

Installment Loans Aren’t for Everyone but Provide a Service for Many Americans

Payday loans, installment loans and other short-term loans have long been divisive. For someone who doesn’t live paycheck to paycheck and who has excellent credit, the idea of taking out a short-term loan with a high interest rate seems to be not ideal. However, millions of Americans with poor credit and low-paying jobs turn to them each year, and most of them come away feeling positive about their experiences.

Reports of predatory practices within the installment loans industry appear to have been blown out of proportion. Between July 2011 and August 2015, approximately 10,000 complaints were filed against short-term lenders. That sounds significant until one considers the fact that every year, more than 12 million people use short-term lending services. In other words, less than a tenth of 1 percent of those who use short-term loans file complaints against the lenders that provide them. Further, many of these complaints are lodged against actual scam artists and not against legitimate installment loan providers, of which there are many.

Installment Loans Can Lead to Debt Trap Situations When Used Improperly

Opponents of short-term loans typically categorize these services as nothing more than “debt traps,” stating that lenders deliberately prey on desperate, low-income people in order to make a quick buck. Such reports must be taken seriously, of course, and enough evidence exists that the CFPB largely agrees with these sentiments. The agency has recently intensified its efforts to impose harsh restrictions on the industry. Recently, the CFPB released a report outlining new rules that it would like to have enacted. If they get their way, some segments of the industry could see revenues drop by as much as 84 percent.

The proposed rules fly in the face of what short-term loans are about. For example, one idea is to require lenders to make sure that borrowers can repay such loans when they are due by essentially running credit checks on them. Needless to say, this isn’t going to work because most people who need these loans have bad credit and nowhere to turn. The new rules would require lenders to check consumers’ income, debts and borrowing history before approving them for short-term loans. There would also be a 60-day cooling-off period between loans, and all lenders would be prohibited for 60 days from lending to consumers who have taken out three such loans in a row.

Another idea that the CFPB floats around in its report is to require short-term lenders to provide “affordable repayment options” and to limit the number of loans that people can take out in a row and over the course of a year. Such rules would dictate that borrowers can’t be kept in debt for more than 90 days in a 12-month period, and loan rollovers would be capped at 2. At that point, a 90-day cooling-off period would get started.

How New Rules Could Affect the Industry

Despite its in-depth report, the CFPB’s small business review panel ultimately suggested that the agency “seek additional information on potential impacts and consider certain alternatives that might reduce the burden on small entities.” In other words, the panel isn’t sold on the proposed regulations just yet.

More information about the CFPB’s proposed regulations and other finance topics can be found at the finance blog.