Look for up to two-thirds of them to go vacant as loan volume is cut by more than half once new rules from the U.S. Consumer Financial Protection Bureau, or CFPB, are in place.
“Nowhere do they answer, or even contemplate, the essential question: what happens to a consumer who walks into a payday loan center and is unable to get a loan to meet an urgent financial need?” – Jamie Fulmer
A pair of independent studies bears out a conclusion by the CFPB that a sweeping regulatory overhaul the bureau wants would put the $8.7 billion-a-year payday loan industry on the endangered list. The studies were done by credit reporting agency Clarity Services and international consulting firm Charles River Associates.
The CFPB projects that forcing payday lenders to verify that a borrower can repay the loan would decrease loan volume by an average of 65 percent. The bureau calls it a “substantial consolidation.”
The industry calls it a road to extinction built on a pretext of protecting borrowers. The strategy is to “eliminate short-term lending,” said Jamie Fulmer, senior VP of Public Affairs for Advance America, Cash Advance Centers who has taken on the role of principal spokesman for the payday loan industry.
Added Fulmer: “Nowhere do they answer, or even contemplate, the essential question: what happens to a consumer who walks into a payday loan center and is unable to get a loan to meet an urgent financial need?”
In an overview of the regulatory proposals released in late March, the CFPB said it recognizes the need consumers have for short-term credit but worries that the “practices often associated with these products” can trap consumers in debt.
Practices cited include a failure to underwrite for affordable payments, repeatedly rolling over or refinancing loans (illegal in Mississippi), accessing the consumer’s deposit account for repayment and performing costly withdrawal attempts.
Payday lenders now require that borrowers have both a source of income and an active checking account. But the CFPB wants to require payday lenders to “determine at the outset” that the borrower is not taking on unaffordable debt.
As an alternative, lenders can choose a “debt-trap protection” option requiring them to comply with various restrictions designed to ensure that consumers can affordably repay their debt. Rollovers would be capped at two – for a total of three loans – followed by a mandatory 60-day cooling-off period. The second and third consecutive loans would be permitted only if the lender offers an affordable way out of debt, Gilford said.
Under the debt-trap protection option, lenders would generally have to adhere to a 60-day cooling off period between loans, Gilford said in an email. “To make a second or third loan within the two-month window, lenders would have to document that the borrower’s financial circumstances have improved enough to repay a new loan without re-borrowing.
After three loans in a row, all lenders would be prohibited altogether from making a new short-term loan to the borrower for 60 days.”
Fulmer calls the CFPB’s ability-to-repay proposal that borrowers have a specified payment-to-income ratio “arbitrary.” The bureau says it is looking at whether a ratio of below 5 percent sufficiently protects borrowers. Combined with the debt-trap protection measures, the CFPB proposals would put two-thirds of payday lenders out of business, Fulmer said.
The Clarity Services study projected the proposed rules would cut the number of regulated loans by more than 70 percent and kill off small lenders, said study author Rick Hackett, a former assistant director of research for the CFPB. “The mono-line payday storefront business could not sustain that volume of loss and, we think, likely would cease to exist under the bureau’s proposed rule,” Hackett said.
The Charles Rivers Associates’ report projected that the proposed regulations, when applied to 2013 data, would cut payday loan revenues by 82 percent on average.
In the Clarity Services study, Hackett examined more than 87 million small-dollar loan records from major lenders, according to Fulmer.
The Charles Rivers Associates’ study looked at loan data and financial information from a sample of small payday lenders that included 1.8 million loans to 150,000 consumers across 234 stores and 16 states, Fulmer said.
Payday lenders will get their say on the proposed rules when the CFPB convenes a small business review panel to gather comments and suggestions from the small-dollar lenders.
A public comment period will follow.
Meanwhile, the new rules could have a huge bearing on payday loans in Mississippi, where approximately 1,100 payday lenders operate under the state’s 2012 Check Cashers’ Act. Unlike Mississippi law, the new rules would allow loan “rollovers,” though the proposal does specify that the lender must offer the borrower an affordable way out of debt.
The payday loan industry’s Fulmer said Mississippi and other states should be concerned by what he says is the CFPB’s failure to analyze the effects the new rules would have on state regulations. Unintended consequences could lie ahead, he said, citing the nullification of laws that protect consumers while also helping to ensure access to short-term credit.
Stephen Schelver, attorney for the Mississippi Department of Banking and Consumer Finance, said in a recent interview it’s unclear whether Mississippi could keep loan rollovers illegal. “How this is going to work with each state remains to be seen,” he said.
Bill Bynum, CEO of Jackson-based Hope Federal Credit Union and a member of the CFPB Advisory Board, said in a recent interview it’s difficult to predict what the final rules will look like. “We are a long way from what will ultimately be law,” said Bynum, who through Hope Federal Credit and non-profit parent Hope Enterprise Corp. seeks to alleviate “banking deserts” that make payday lenders the only choice for small short-term loans.
“Hopefully,” Bynum said, “they (the CFPB) won’t walk away from their responsibilities to make sure borrowers are treated fairly.”
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