The biggest concern facing payday lenders and their customers right now is what the new Consumer Financial Protection Bureau is going to do to the business. What powers will it have? Who will run it? Will credit be regulated out of business?
So what’s going to happen? This article will try to advance some possibilities – both optimistic and pessimistic.
It’s impossible to say right now how it will all turn out. It’s even possible that the new Republican-controlled House will try and pass legislation to restrict the new Bureau’s powers. However, with a Democratic Senate and President, it seems unlikely the new Bureau will be restricted or defunded. Nevertheless, American Banker magazine said “Senate Democrats, who remained in control despite a narrow majority, acknowledged the vote was a call for more moderation and consensus, but warned their House colleagues not to re-fight unwinnable battles.” One interpretation is that a call for moderation will give payday loan lobbyists the opportunity to be heard. By presenting their honest and convincing case for payday loans, the CFPB may rein in any attempt to over-regulate the industry.
The other positive aspect to the creation of a whole new bureau is that it will take time to implement any new regulations. Furthermore, the call for moderation buttresses the interpretation that any bureau will act cautiously and make certain that what they do isn’t overly-restrictive. American Banker points out that, “The CFPB will have to acquire real-world data on a variety of financial products and their impact. Examining credit cards alone will need data elements ranging from credit card products, terms, fees, outstanding debt, average percentage of debt per household, demographics of households and so on. Another large data segment comprises the list of “covered persons.” The bureau needs to manage master data elements, such as covered entities and products, to fully understand relationships, hierarchies and exposures. In addition, the research department in the CFPB could have potentially more wide-ranging data acquisition needs.”
This suggests that it may take a long time to really learn the details of payday loans before any regulation is presented.
The final optimistic angle is that The Baltimore Sun’s blog stated that Warren’s top three priorities will be to, “Make it easier for families to see the costs and risks of mortgages they are considering. Cut down on the fine print of credit card agreements. Use technology to tap into the experience of millions of consumers so the bureau can develop a rapid response to problems.”
There’s no mention of payday loans in there.
But there is a pessimistic side to the equation. We have to look to the words of Elizabeth Warren, who was hired to be the architect of this new Bureau. Warren has been outspoken about payday loans in the past.
““From subprime mortgage loans to small dollar loans, [non-banks] showed how to wring high fees and staggering interest rates out of consumer lending. Their fine-print contracts, and new tricks and traps, transformed the market.”
I presume she refers here to payday loans. Clearly, Ms. Warren has not set foot into a payday loan store. If she had, she would first learn that all fees on payday loans are disclosed in large text per TILA requirements. I and others have written many times about the false characterization of payday loan fees as “high” or “staggering’, and won’t reiterate that here. In addition, payday loans have no “tricks and traps”. You take a loan, it’s due on your next payday. It’s that simple, and everyone who uses a loan knows that.
This again speaks to the need for research prior to regulation.
But I digress.
On the pessimistic side, the Bureau may not have the power to cap interest rates, but it can do just about everything else, including limit the number of loans a person can take out – even down to one per year. The language of the Dodd-Frank bill, which created the CFPB, gives the bureau broad powers.
This exhaustive list of the CFPB’s power can be interpreted many different ways. The CFPB may be able to create all kinds of unpalatable requirements for payday lenders. While Ms. Warren is not the official director of the CFPB, it isn’t a huge leap to suggest that the architect of the bureau could very well get nominated and confirmed as its chief. Worse, she has stated disdain for non-banks. If she wants payday loans dead, they’re dead.
Here’s one example: The CFPB can call payday lending businesses abusive if they “takesunreasonable advantage of (a) the lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; (b) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service.”
It can call payday lenders “unfair” if “the practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers and … is not outweighed by countervailing benefits to consumers.”
Imagine the most restrictive interpretation of these phrases!
A lot of what happens may ultimately depend on who actually runs the CFPB. As I said, I’m concerned that Warren will be the obvious choice. The Credit Union Times feels the same way – and when credit unions are worried about regulation, you know there’s a lot to be concerned about.
“Putting aside her unorthodox selection process, having Warren molding the powerful new agency that has the authority to prohibit financial product offerings and control prices confirms my worst big government nightmares. Like many other financial services industry executives who have been following the CFPB saga, I had hoped that the unwanted agency’s leader would not be a partisan activist, but rather someone who would work effectively with all constituencies – including the industry and the other regulatory agencies. With her frequent accusations of financial services providers’ “tricks and traps” and her punitive crusade against traditional banking “bullies,” she is expected to act more like a rogue cop with a chip on her shoulder than as an even-handed and fair referee in a complicated marketplace.”
The bottom line is that tremendous uncertainty exists in the payday loan sector. One thing is very likely, however. Online payday lenders may be able to escape regulation. Many of them are now located offshore. This means they are not subject to U.S. regulations. In the worst case scenario, consumers in need of a payday loan should always be able to get one on the internet.
