The proposed rules for payday loans are a blow, but not a knockout


The Consumer Financial Protection Bureau has proposed new regulation for payday loans Thursday, but industry analysts say lenders are down but not yet out.

The proposed rule does not go so far as to ban the industry altogether, which was feared based on previous discussions. However, Congress explicitly prohibited the CFPB from imposing an interest rate cap on payday loans, a regulation that in the past was controlled by the states. This means that life goes on for the industry, albeit potentially under restrictions at the federal level, rather than patchwork at the state level.

Instead, the CFPB rule, mandated by the Dodd-Frank Act, focuses on lenders who give short-term loans without reasonably determining that the consumer will have the capacity to repay them. High interest rate for a short term loan made with minimal verification of ability to pay and limited collateral are the main features of the industry. The CFPB press release sent out Thursday before its announcement said that “most consumers who take out payday loans cannot afford to repay all the money they owe by their next paycheck.”

See:New Rules Aim to End Payday Loan ‘Debt Traps’

The additional ability to pay provisions will be expensive and time consuming, and reduce lending to those who need it most, said the industry business group and House Financial Services Committee chairman Jeb Hensarling, a Republican of Texas. In a statement released Thursday, Hensarling cited a recent Federal Reserve report that said nearly half of American families are struggling to afford emergency expenses of $ 400. “Here is manager Cordray to make their fight even more difficult,” Hensarling said. “Not accountable to anyone, he decides on his own for all Americans whether they can take out a small loan to meet emergency needs. “

The proposed rule gives some lenders leeway with some of the new documents if they can prove a very low portfolio default rate, known as the “portfolio” approach. These lenders are more likely to be community banks and credit unions that lend to clients or members with whom they have had a long-standing relationship. The portfolio approach would allow these lenders to avoid many of the additional costs of making a reasonable determination that the consumer can make the loan repayments and be able to meet other major financial obligations and costs. basic subsistence without having to borrow again over the next 30 years. days.

But the new verification provisions will put the brakes on lending. That’s the conclusion of Ed Groshans, analyst at Height LLC. In a research note released Thursday, Groshans said he expects the payday lending industry to contract significantly once the rules take effect, likely in the first half of 2017. Groshans thinks very little loans will be issued under the portfolio approach, from the 5% threshold. default is well below cancellation rates for subprime loans.

He writes that World Acceptance Corp. WRLD,
+ 0.24%
reported net write-off rates of 14.8% in fiscal 2016 and 12.9% in fiscal 2015. Enova International Inc. ENVA,
is the most exposed company in the payday lending industry, he wrote. Payday products represent more than 20% of its total revenue, and the company reported a default rate of 13.1% in the first quarter.

The proposed rules also make it more difficult for payday lenders, vehicle title lenders and similar low-value loan providers to roll over a loan and require that the consumer’s financial situation improves significantly during the term of the loan. second loan. The rule would cap total loans at three successive loans, followed by a 30-day cooling off period. The CFPB also wants to prevent lenders from repeatedly debiting borrowers’ bank accounts, actions that often cause overdrafts and accumulate additional fees and charges for the borrower.

Dennis Shaul, chief executive of the Community Financial Services Association of America and a former senior advisor to former Massachusetts representative Barney Frank, told a press conference Thursday that his group was ready to sue if the elements were “unworkable. and damaging ”of the CFPB proposal are unchanged at the time a final rule is published, most likely a year after the end of the comment period on October 14.

He cited an estimate that the CFPB rule would eliminate 84% of the volume of loans in this category.

Shaul said he hopes his group can provide enough research to counter the provisions that its members believe are negatively impacting consumers. In addition, the CFSA expects the CFPB to conduct an economic impact analysis and review state-level regulations that already protect consumers.


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