New CFPB Payday Loan Rules Would Kill the Industry

The Consumer Financial Protection Bureau, or CFPB, recently proposed new regulations that are geared toward eliminating payday loan debt traps. In particular, the agency will require lenders to confirm that consumers are able to repay the funds that they borrow. The new protections will cover payday loans, specific high-cost installment loans, auto title loans and deposit advance products. The new CFPB loan rules would kill the industry by preventing it from lending to those who need access to these types of loans the most.

New CFPB Payday Loan Rules Would Kill the Industry

Because the new rules strike at the heart of the short-term lending industry’s basic business model, the CFPB has a good shot at killing the entire industry. Richard Cordray, the director of the CFPB, said, “The Consumer Bureau is proposing strong protections aimed at ending payday debt traps.” While many people are cheering at the thought of the industry’s demise, there are those who are wondering where poor Americans will go for emergency funds.

The agency has shared its concerns about the business practices of the short-term lending industry. It believes that these types of lenders push consumers into debt traps. According to the CFPB, one of its biggest concerns is that borrowers are entering into loan agreements that they are unable to repay. Because of the unaffordability of the payments for these loans, borrowers must decide between extending the loan terms, defaulting on the loan or ignoring other important financial obligations like rent, food or medical care to pay it.

What are the Consequences of the New Payday Loan Rules?

Because the CFPB is requiring the payday loan industry to begin using an underwriting process, lenders will have more expenses. The rules will also slow down the processing of lending transactions and disqualify a number of consumers from borrowing. With the inclusion of a loan limit, the industry will struggle even more.

According to Slate, the short-term loan industry profits enormously when people roll over their debt. Reports show that the typical payday loan lasts for two weeks. However, the CFPB determined that 80 percent of these loans are either renewed or rolled over. The agency wrote, “Half of all loans are in a sequence at least 10 loans long.”

How Much Business Can the Industry Stand to Lose?

It’s tough to determine how much business payday lenders are likely to lose with the new regulations in place, but the CFPB estimated that the laws could cause the industry to lose from 69 percent to 84 percent of its business. According to some calculations, if the industry’s customer volume drops by just 30 percent to 40 percent, then it’s likely kaput.

Under the new regulations, short-term loan lenders can avoid some of the agency’s restrictions on who they can lend to if they provide loans that can be paid off entirely after two renewals. Even with this exception in place, the CFPB still believes that the new rules will cut the industry’s overall loan volume by at least half. The regulations will also prevent the industry from earning high profits by charging excessive fees.

Predicting the Next Step for Payday Loan Lenders

The payday loan industry tends to be a crafty one, so it will likely come up with a few inventive workarounds to the new rules. Lenders may transition their operations to the Internet or to offshore locations. A few have already started to set up their headquarters on Indian reservations, so more lenders may embrace this trend. Others will surely come up with new lending products that are not regulated by the CFPB.

Despite the industry’s creativity, the new rules are still a blow. Mehrsa Baradaran, a University of Georgia law professor, said, “I have no doubt that there will be a new form of high cost lending. You’re going to see this cat-and-mouse game, but at least the cat is paying attention, and it’s a super cat.”

Will the CFPB Send the Industry Packing?

Around 12 million Americans turn to payday loan lenders for emergency funds. If lenders go out of business, these people will be left with few options when urgent situations arise. The demand for this type of service is substantial. If the government is serious about eliminating the short-term loan industry, it must develop other ways for people to gain access to funds during an emergency.

Baradaran said, “You really do have to pair any regulation of an incredibly popular product with an alternative.” If this fails to happen, the people that the CFPB is attempting to help will be harmed instead. To learn more about the CFPB’s new rules, visit the