Could Payday Loans Online Become a Thing of the Past?
Rate caps were all the rage a few years ago with voters in a slew of states approving caps to the interest rates for payday loans online. At the time, the industry predicted that many stores would go out of business, and they were right. According to Governing.com, about a year later, payday loan lenders were closing their physical locations and putting people out of their jobs. But, that’s not the end of the tale. As it turns out, many of these lenders were able to transition their operations online. So, will payday loans online become a thing of the past like their physical counterparts? If regulators have their way, then they could.
Are Payday Loans Online Here to Stay?
Across the nation, payday loan lenders are feeling the pressure. Even Texas is reconsidering its welcoming attitude toward them. The industry’s future may rest on whether Donald Trump makes good on his promise to decrease the power awarded to the Consumer Financial Protection Bureau or CFPB.
Last year, the agency published a set of proposed rules including one that would require lenders to confirm that a borrower has the means to repay a loan before issuing one. If the CFPB’s rules go into effect as planned next year, then lender compliance costs are likely to put about 70 percent of short-term lenders out of business.
Facing a Regulatory Challenge in Texas
In Texas, the state’s leniency in permitting advance payday lending is being challenged. According to D Magazine, some 39 cities have implemented ordinances that are restricting particular industry practices. This includes placing limits on loan amounts based on borrowers’ incomes. Statistics show that in Texas, about 8 percent of the state’s residents have taken out a payday loan while this number is 5.5 percent nationally.
In 2015, the state had 23.1 percent of all payday lending stores. James Barth, a finance scholar who oversaw part of the lending research, said, “Things remain somewhat uncertain at the moment about any legal or regulatory changes due to the election.”
If the CFPB’s regulatory changes are implemented, then they will impact most of the players who operate as alternative financial lenders. Online payday loans can be a pricey form of financing for borrowers, but for many people, it is the only option that they have.
Should the Government Attempt to Regulate the Payday Online Loan Industry?
When it comes to regulating the payday online loan industry, regulators have a tough task. Should the government even make the attempt? Alternative finance lenders cater to the one in four borrowers who traditional lenders won’t even consider lending to. The borrowers of online payday loans don’t capture the attention of banks like wealthy borrowers do.
Lisa Servon, the University of Pennsylvania’s planning professor, said, “I worked as a check casher in California. The boss told me, ‘The largest banks want one customer with a million dollars. Check cashers want a million customers with one dollar.”
What Will Happen if Over-Regulation Eliminates Alternative Finance?
If over-regulation gets rid of payday loans online, borrowers who need money quickly could be stuck turning to unregulated options, ones that are dangerous. Jim Hawkins, an associate professor of law for the University of Houston Law Center, said, “Colorado has placed restrictions on payday lending rates, but the usury cap is high enough to allow lenders to make money by making adjustments. That’s the regulatory sweet spot.”
At the moment, the lending market lacks a viable alternative to payday online loans. The reason for this is that these financiers seem to be less profitable than regulators believe. According to one study, Starbucks has a larger profit margin than many payday lenders. A major problem for payday loan lenders is dealing with unpaid loans. In fact, the study found that unpaid loans ate up a quarter of their profits.
In Support of the Payday Loan Industry
There is support for the online payday loan industry. The CFPB has received more than one million comments about its proposed set of rules with more than half of them opposed to the changes. This has also occurred in states like South Dakota. Payday loan supporters spent more than $650,000, which was more than 14 times the amount that those who oppose the industry spent, to keep the industry as is. Even with the additional funds, the rate cap went into effect in the state.
The argument against regulation has merit. According to online payday loan lenders, they offer quick cash for people who are facing a financial emergency. While the annual percentage rate, or APR, is high for these loans, the repayment terms are usually short, meaning that people don’t stay indebted for years.
Most loans in this category are for two to four weeks with people borrowing less than $500. A typical charge for this type of loan is $15 for every $100 borrowed. According to the industry, this is equal to 15 percent in interest. With the 36 percent rate cap, the cost to lend these funds would be lowered to just $1.36 for every $100 borrowed. Bernie Harrington, the Montana Financial Service Center’s president, said, “No one can loan money at that rate. The losers will be the residents of Montana who need to borrow $150 to make a car payment and the hundreds of people who will lose their jobs.”
Finding Another Way to Stay in Business
Payday loan lenders have been staying in business by aligning themselves with Native American tribes. In doing so, they’ve been able to claim sovereignty under the country’s different Indian nations. Several states have prosecuted lenders who are operating under Native American sovereignty. Some have been found guilty while others have had their cases dismissed.
There may be another way for online loan lenders to stay in business, which is to apply for a nonbank charter. According to a recent report, the U.S. Treasury’s Office of the Comptroller announced that it was considering a proposal that would permit financial technology companies to request this kind of charter. If nonbank charters become a thing for these companies, then it could open the door to payday online loan lenders.
Is There a Better Way to Lend Money?
If traditional financial institutions change their business model and start lending money to people who have credit problems, then the payday loan industry will be in trouble. If this were to happen, online payday loans would likely become an unneeded financial product. This scenario is an unlikely one due to the lack of profit, so payday loan lenders are sure to stick around.