The Great Payday Lending Fizzle

According to Pew Charitable Trusts, about 12 million Americans take out a payday loan each year. The typical loan is $375. Borrowers are usually employed full-time (thus the “payday” moniker), must have an active checking account and, by most accounts, would appear to be “middle class” or “working class,” according to Pew.

But based on the CFPB’s regulations published yesterday (June 2), maybe not for much longer.

 “Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt,” CFPB Director Richard Cordray said in a statement. “It’s much like getting into a taxi just to ride across town and finding yourself stuck in a ruinously expensive cross-country journey.”

The regs, which have the potential to wipe out 65 to 85 percent of the industry, are not exactly in keeping with their stated intent last year when their review process started: to find a way to ensure consumers could continue to access small-dollar, short-term lending products but not risk abuse while they do so.

The CFPB’s Angst

As a category, payday loans are controversial, both for the population they serve (which is also often very misunderstood) and what critics argue is the rather expensive way in which it serves those customers.

The controversy around payday loans stems from two connected but separate areas. The first are the fees. Borrowers pay fees of an average of $50 per loan, and borrowers end up taking out a lot of loans. The average payday loan borrower is not one-and-done, according to Pew’s research, and instead takes about eight loans and pays an average of $520 in interest and fees (over and above the about $375 they keep rolling over and re-borrowing).

Payday loan opponents argue that the business model is built on preying on consumers in desperate need and are onerous debt traps meant to ensnare the vulnerable. They also claim that payday lenders are disingenuous when they talk about $50 fees, since their business models are actually built on rollover lending and the fee bonanza that comes from continual renewals. The lenders don’t want their customers to use their products responsibly, opponents argue; they, in fact, depend on the idea people won’t.

Proponents, however, have noted that expensive money in a crisis — and payday loan borrowers are almost always borrowing to pay a bill of some kind — is far better than the alternative of no money in a crisis, especially since more than half of Americans don’t have enough in the bank to cover a $400 emergency repair.

Moreover, they note, the money is expensive for a reason, and it isn’t the arbitrary cruelty of those who do the lending. The pool of borrowers is incredibly risky, which is why they are otherwise unable to access credit products that come at much lower costs. But customers in need, proponents argue, are exactly that, in need, which means cutting off their access to a last resort funding stream is not protecting consumers so much as putting them in the line of some very tough decisions.

The Really Tough Decision

While you can click here for the fuller recap, the CFPB’s new regulations make four changes.

The first requires the lender to establish the borrower’s ability to repay and limit individual loan payments per pay period to a level that would not cause financial hardships. The law also requires payday lenders not to allow consumers to re-borrow immediately or carry more than one loan, pushing lenders toward offering consumers installment loans, as opposed to super-short-term loans with a single balloon payment. The law also limits how and the number of times lenders can attempt to directly debit payments from borrowers’ accounts in the event that there are not sufficient funds to cover the loan payment.

When the dust cleared and the various explanations were written, the overwhelming reaction was, well, pretty underwhelming. The new rules — all 1,400 or so pages of them — drew some applause, though they were faint, while the complaints were more … distinct.

Some of those complaints came from where you might have expected. It was always a pretty outside shot the payday lending industry was going to be filled with rapturous happiness by these rules. But some of those came from corners usually friendly — Team Pew in particular, which found itself in a curious sort of agreement with the payday lenders on some points.

So, what happened, and how did the CFPB manage to release rules that did more fizzling than sizzling yesterday? We decided to talk to two very different sources on the rules, whose outlooks are mostly (and expectedly) different.

But, as it turns out, not entirely.

Because as it turns out, Nick Bourke, director of Pew’s small-dollar loans project, and Jamie Fulmer, Advance America’s SVP for public affairs, had at least one important thing in common yesterday.

They were both pretty disappointed.

Why Talk To The Customer When You Know Better?

“They Never Once Said They Talked To Customers. That’s A Pretty Glaring Omission.”

Advance America is the largest provider of non-bank cash advance services in the United States, and it operates over 2,500 lending centers in 29 states. As it will be among the most affected by the CFPB’s new rulings, it is unsurprising that it had a strong reaction to the rules that dropped.

“This has the potential to decimate an entire industry,” Fulmer noted.

“A couple of things are pretty clear. The intent of their rule is to reduce access to credit for millions of American consumers who use this product to their satisfaction each and every year,” he added.

Fulmer says that, contrary to the popular version of this story, payday lenders aren’t instinctively hostile to regulation — or, at least, not all payday lenders are hostile to legislation because not all payday lenders are the same. The reality, he notes, is that there are lenders like Advance who have been operating in a legal and highly regulated way for quite some time, and then, there are the barely regulated or outright illegal operations that the CFPB often confuses them for.

“The bureau isn’t acknowledging that there is a legal, regulated industry and illegal scam artists,” Fulmer noted. “They paint the whole industry with the same broad brush that focuses on the actions of illegal operators.”

And that is problematic, because the tendency to view all payday lenders as essentially the same — lawless predators — means the CFPB’s proposed laws are pretty clearly aiming at driving the majority of the payday lending industry out of business.

“That is a tough explanation to swallow,” Fulmer said of the common refrain today that the CFPB isn’t trying to eliminate short-term lending, just eliminate some of its worst and most abusive excesses.

“By their own admission, in their own documents, they say 65 percent to 85 percent of the industry will go away. It’s hard to say we aren’t trying to put anyone out of business and then say that 65 to 85 percent of the business is going away. That seems a bit disingenuous.”

And, worse than disingenuous, says Fulmer, it’s also rather shortsighted.

“What realistic alternatives will exist if they drive the regulated industry out of business?” he asked. “There’s a lot here in terms of unintended consequences.”

Customers, as countless studies indicate, like payday lending products and tend to rate them favorably. Even the CFPB has had to admit that payday lenders are not one of their complaint magnets. While the consumer grievance database is stuffed with complaints about debt collectors and credit rating agencies, payday lenders are relatively rarely mentioned. Some — like one faith leader speaking in favor of the new regulations at a field hearing in Kansas City — noted the lack of complaints were indicative of consumer shame at getting a payday loan (and thus not wanting to complain), not a lack of grievances.

But Fulmer says his data offers a different — and more straightforward — answer: Consumers don’t complain about these products because, costs and all, they like them. Or, at least, they like them better than the alternatives.

And that, Fulmer noted, is something the CFPB might have factored into its rules — if it had bothered to ask any consumers.

“They proclaim this research is comprehensive, while constantly leaving out the perspective of the customer. The director … went out of his way to talk about all the constituents they talked to — faith-based groups, consumer advocacy groups, industry groups, legislators, regulators, attorneys general — but he never once said they talked to customers.”

And if it had, Fulmer says, it might have learned that while it was adding time, complexity and cost to the process, it isn’t adding much consumer value.

And on that point, Fulmer has found an odd ally in his argument: Nick Bourke from Pew.

“We don’t agree with Pew on much, but on this point, we do agree.”

“The CFPB Proposal Misses The Mark”

The Pew Charitable Trusts’ short-term, small-dollar loans project team has spent more time and man hours studying payday lending than just about any group, and its figures are normally treated as a gold standard. Pew is no great fan of payday lending and normally does not find itself on the same side of the issue as Jamie Fulmer and Advance America, but yesterday was an unusual day.

Nick Bourke was also pretty disappointed in the CFPB, albeit for some rather different reasons.

“The CFPB is missing a big opportunity to encourage safer and more affordable loan options,” Bourke noted on how exactly the consumer protection group missed the mark. “The new proposal lets 400 percent APR loans flourish but locks out lower-cost loans from banks.”

Now, Bourke did have some positive things to say. Pew, like many, is on the consumer advocacy side of this issue.

“The good news is this market is changing, and that is urgently needed,” Bourke said. “The CFPB rule will shift the payday and installment loan market toward installment lending, which is good. Conventional payday loans that are due back in under two weeks that take more than a third of the borrower’s paycheck are harmful. Regulatory reform is urgently needed.”

But in a refrain that sounded a little bit familiar, just trying to weed out bad actors — and Bourke notes that some payday lenders will probably close as a result of this — isn’t really enough of a solution. The rule is so focused on bad actors, it neither acknowledges nor makes any attempt to create good actors.

“The CFPB should put clear loan safety standards in the rule,” Bourke noted. “We’re disappointed in some things here. The CFPB put a framework out in 2015, and the best part of their original framework is now missing. Originally, they were putting out the 5 percent option, which would limit the loan payment to 5 percent of a customer’s paycheck and for a duration of less than six months.”

Bourke noted that, far from being unrealistic, several banks confirmed with Pew that they had begun developing products around that standard.

“That would save millions of borrowers billions of dollars.”

However, without that framework in place and with current regulatory guidance from the FDIC and OC’s office indicating banks are to stay away from these types of products, no alternative to payday lenders has any room to even try to step up.

So, the CFPB’s new rules have made it slower and harder to get a payday loan, Bourke notes, but no less expensive and without doing that extra step of providing the reasonable consumer alternative. And suddenly, Bourke’s objection sounds a lot like Fulmer’s.

“The CFPB should be focusing on giving borrowers what they want. Lower prices, installment payments and quick loan approval. Research has shown there are clear ways to do that with product safety standards. The CFPB is failing on that standard.”

So, how did the CFPB manage to create unity on two diametrically opposed side of an argument with a fizzle that likely deserves an award?

As the story unfolds, here are four observations.

First, the CFPB seems to have failed to listen to consumers — or a diverse enough sample of consumers — to include those who have been helped by these products and used them responsibly.

Second, they’ve found a way to punish a problem but forgot the part about offering any kind of solution or a plausible framework for getting to one.

Third, it took a sledgehammer to a problem that could have used a scalpel. There are bad actors, and they should not be allowed to prey on consumers. Taking steps to tamp that down is admirable. But there are a lot of good actors who may be forced to close down as a result of a decision that seems to have failed to take into consideration both the situations for which these loans are needed and the costs associated with imposing the same underwriting standards on a $375 loan that are required on a $375,00 loan. That may make it harder for the good actors to offer products that the vast majority of borrowers value and repay responsibly. Among those good actors are the FIs that the CFPB hoped would step in and help fill the gap. At least at first blush, it appears that these banks will be shut out of this opportunity given the requirements of the CFPB’s new rules.

And fourth, the need for these products will not disappear. Consumers still need them, and all we can hope for is that the unintended consequences of the CFPB’s actions don’t force those in need to pursue avenues for short-term, small-dollar credit that have the potential to really do them harm.

But, of course, the process is just beginning.

Stay tuned.