Taking a Step Back from Cash Advance Loans
Online lenders are dissociating themselves from cash advance online loans to avoid the kind of crackdowns that government agencies are considering for the lenders of cash advance loans and other financial institutions that engage in predatory lending tactics.
The New York Times reports that the online lending industry is just getting off the ground. While this type of lending offers similarities to cash advance loans since it provides funds fast, the money that it lends to borrowers is under different terms.
This summer was a tough one for the online lending industry. First, the founder of the Lending Club, Renaud Laplanche, resigned last spring because a number of loans were mismanaged. Not long after that, several online loan companies announced that job cuts were on the way due to a lack of investors.
Online Lenders Make Plans to Regroup
To avoid the kind of regulatory oversight that the Consumer Financial Protection Bureau, or CFPB, has in store for cash advance loans, lenders have hired lobbyists, attended several financial technology conferences and enthusiastically shared their business models with lawmakers and legislators. Lenders took these proactive steps because they wanted lawmakers to see their side of the business before the new rules were drawn.
Brandon R. Barford, an associate for the research firm Beacon Policy Advisors, said, “At a minimum, you want policy makers to understand the nuts and bolts of your business, so they give you a fair shake.”
Several online lenders have joined forces by bringing Nat Hoopes, a former director for the Financial Services Forum, in as an executive director. Mr. Hoopes explained his role in the industry by confirming that the goal is “to create an association in Washington that represents online lenders that are consumer-friendly and that adhere to the highest possible standards of disclosure, transparency and fair pricing.”
Because the online lending industry’s intention is to help consumers through fair business practices, it is trying to extricate itself from the field’s online cash advance area.
The Alternate Lending Industry is Packed with Players
Forbes published a report stating that there are around 1,300 companies currently in the business of alternate lending. This statistic includes online lenders. These organizations are vying for about 1 percent of the total market compared to the 6,500 traditional banks that compete for the other 99 percent.
While this market estimate may seem out of line, banks across the nation have confirmed that at this time, alternate lenders are not creeping into their share of the market. Instead, lenders that are distancing themselves from cash advance loans are competing for the 1 percent of the market that traditional financial institutions have long thought were unbankable.
Because there are a large number of lenders contending for such a small share of the overall market, borrowers are likely to experience choice fatigue. To stand out, lenders must find ways to show consumers that their product is different from the others.
A Bill of Rights for Borrowers
In 2015, the Responsible Business Lending Coalition, which is made up of a number of firms and small-business experts, met to develop and publish its own “bill of rights” for consumers of small-business loans and other lending products. Dozens of online lenders have signed the agreement. The Coalition’s bill of rights calls for terms like clear disclosures, confirmation that borrowers can repay the cash loans that they take out through lenders and no hidden penalties.
Finding Common Ground with Cash Loan Lenders
If online cash advance lenders want to join the Coalition’s bill of rights, then along with accepting the agreement’s terms, they’re also required to implement a specific set of standards. These standards could influence the course of the online lending industry. The Coalition’s proposal includes limiting annual percentage rates to 36 percent. This is a smart concession to make because many states have enacted this same interest rate restriction, which shows that they are comfortable with the amount.
The bill of rights prevents lenders from offering payday loans or merchant cash advances, which are different from consumer-based cash loans. A merchant cash advance requires a company to repay the loan with a percentage of its future sales. These arrangements generally have high rates and unfair fee structures.
Despite working to detach itself from cash loan lenders, online lending groups may need to find common ground in a diverse market to satisfy the watchful eye of the CFPB.
Staying Ahead of Regulatory Action and the Competition with Safeguards
Experian recently advised the industry that it may be able to stay a step ahead of regulatory action by implementing safeguards for consumers.
One way to do this is by embracing true credit reporting. With credit reporting, the online lending industry will be able to prove to the CFPB that it welcomes the spirit of transparency and that its standards line up with a number of regulatory priorities. This proactive step may give lenders a way to stay ahead of regulators and alleviate the need for stricter rules.
Because data reporting is new to the industry, it could give lenders that embrace it a way to stand out from the competition. This type of reporting also provides lenders with more information about those who are seeking a loan through them. Lenders can use these details to create better products.
Why are Cash Advance Online Loan Lenders in the Crosshairs of Regulators?
The predatory business practices of many cash advance online loan lenders caught the eye of regulators. Borrowers seek cash loans when financial catastrophes strike. Since these consumers need funds during financially troubling times, they often struggle to repay the cash loan in full by the due date. The balance of the loans escalates quickly. This happens because lenders are more than willing to roll loans over, but the process of doing so results in added fees for the borrower.
The CFPB released proposals that are designed to thwart predatory business practices. Its list of proposals includes making sure that people can repay the money that they borrow in addition to their general living expenses. Regulators also want to limit the number of loans that borrowers can take out.
Solving Policy Challenges to Stay in Business
Online lenders are creating distance between their service and cash advance online loans because they’re worried that the CFPB is going to regulate them in kind. By showing regulators that they can solve policy challenges, online lenders have a shot at avoiding regulatory restrictions. To read more about how the online loan industry is distancing itself from cash loans, visit the Personal Money Store.