By TED CARTER
An extensive transformation of Mississippi’s payday lending and car title lending industry is likely to occur in 2018, starting with a drop in the number of lenders.
That is when the U.S. Consumer Financial Protection Bureau, or CFPB, is expected to begin a clampdown on lenders the watchdog agency says will help keep borrowers from failing into a cycle of debt. The principal way this will be done, the agency says, is through a “full-payment test” by which lenders must verify the borrower can repay the debt. Today, payday lenders typically require only that a borrower have a source of income and a bank account.
The expected tradeoff brought by the full-payment test is a significant thinning of payday lenders nationally as loan volumes fall by as much as 65 percent, independent studies last year by credit reporting agency Clarity Services and international consulting firm Charles River Associates concluded.
“By the CFPB’s own admission, 70 percent of the lenders would go away” under the new rules, said Max Wood, president of Borrow Smart, a Birmingham-based organization that assists low-dollar, short-term lenders with federal regulatory compliance.
The thinning could be especially significant in Mississippi whose 1,100-plus payday loan stores is the highest concentration of such lenders in the nation. The store closings would be in addition to the 43 All American Check Cashing payday loan stores the Mississippi Department of Banking and Consumer Finance has ordered closed over alleged illegal loan rollovers.
How the new era of small-dollar, high-interest lending will look came more sharply into focus last week with the Consumer Financial Protection Bureau’s release of a final set of rules proposed for regulating the lending. A comment period for the proposed rules runs through Sept. 14 and will be followed by more than a year of work by the Bureau to implement the new rules sometime in 2018.
As with reforms the CFPB initiated in residential mortgage lending, the “ability to repay” is at the core of proposed rules for lenders who make payday loans and short-term installment loans. Lenders must do a full repayment test on each loan, including income verification and credit report check. The rules allow a host of exceptions, however.
The new rules also seek to significantly cut the number of payday loans a customer can receive in a 12-month period.
CFPB officials concede they sought an elusive goal: Prevent borrowers from sinking into a debt trap while maintaining the viability of low-dollar lending. The latter goal accounts for the exceptions scattered throughout the new proposed rules, the officials say.
But the CFPB missed the mark with the proposed rules announced last Thursday, says the Pew Charitable Trust, a national non-profit organization that says it seeks to serve the public interest by “improving public policy, informing the public, and stimulating civic life.”
The CFPB, the financial and consumer watchdog created through the 2010 Dodd Frank Wall Street and Financial Reform Act, failed to give states a model they can build on for regulating the small-dollar loan market, Pew said Monday. “In its current form, the proposal lacks clear standards,” Pew said.
“The rule would allow 400 percent APR payday installment loans to flourish and it falls short of protecting consumers in more than half of the states,” Pew said.
Pew said the CFPB action also knocked out prospects for banks to join the ranks of small-dollar lenders. “Just as banks were preparing to offer small loans at prices six times lower, this proposal would freeze them out of the market,” Pew said.
For its part, the American Bankers Association acknowledged the new rules along with past regulatory actions will make it challenging for banks to meet the needs of the estimated 50 million consumers who access a variety of bank and non-bank small-dollar lending products each year. “While the Bureau has frequently expressed interest in expanding banks’ trusted role in this market, the proposal fails to do so in a meaningful way and will significantly limit the availability of small-dollar credit,” said Virginia O’Neill, senior vice president of the American Bankers Association’s Center for Regulatory Compliance.
O’Neill said, however, the ABA recognizes the need for “a vibrant market with many choices for short-term, small-dollar credit” and will work with the CFPB to establish such a market.
In Mississippi, the CFPB rules gained an endorsement from Bill Bynum, the head of Hope Enterprise Corp., a non-profit community development group and parent of Hope Federal Credit Union. “The proposed small dollar loan rules released by the Consumer Financial Protection Bureau (CFPB) will bring much-needed relief to consumers,” said Bynum, vice chairman of the CFPB’s Consumer Advisory Board.
“By making sure borrowers will only be placed in loans that they can afford to repay, and not subjected to predatory cycles of debt and collections, the CFPB strikes a balance of eliminating some of the most abusive financing practices currently in use, while creating an environment where responsible credit remains available.”
The Center for Responsible Lending recently completed a study that found payday loans drain $4.1 billion in annual fees from borrowers living in Mississippi and the 35 other states where the loans are legal. “On a typical $350, two-week loan, borrowers will pay $458 in fees,” the Center for Responsible Lending, or CRL, said.
Similarly, car title loans in Mississippi and the 22 other states that allow the loans represent another $3.9 billion in fees yearly, according to the Center.
The CRL said it thinks the Bureau diminishes the effectiveness of an ability-to-repay rule by allowing up to three loan renewals on a payday loan. By sanctioning rollovers, which are evidence of inability to repay, and exempting six very high-cost loans annually from an ability-to-repay requirement, “the Bureau would undermine the basic principle of requiring universal ability-to-repay,” the CRL said in an analysis last year of the rules the Bureau initially proposed.