Where Do You Stand On Payday Lending?

October 6, 2017 at 9:32 am 1 comment

Image result for payday lendingMore than any other mandate imposed by the CFPB, your opinion about what it accomplished yesterday by severely restricting the payday lending industry  depends on what you think the financial industry can and should do to help consumers.

If you fancy yourself a consumer protection advocate, yesterday’s announcement by the CFPB that the benign dictator of consumer finance has finalized regulations cracking down on payday lenders may very well be a high watermark.

If you are like your faithful blogger and would like to see a world without payday loans but are realistic enough to realize that this is never going to happen, yesterday marks the high point of the CFPB’s delusion that, with just the right amount of nudging, government can protect people from themselves;

And if you are a credit union person whose job it is to see how this regulation will impact your operations, you have a lot of reading to do but there appears to be some positive signs.

So what is a payday loan according to the CFPB? As described in the Bureau’s executive summary, payday loans are “Short-term loans that have terms of 45 days or less. Closed-end loans are covered short-term loans if the consumer is required to repay substantially the entire amount of the loan within 45 days of consummation. Open-end loans are covered short-term loans if the consumer is required to repay substantially the entire amount of any advance within 45 days of the advance.” In addition, longer term balloon payment loans are covered if “1) it is structured as a loan with multiple advances where paying the required minimum payments may not fully amortize the outstanding balance by a specified date or time; and 2) the amount of the final payment to repay the outstanding balance at such time could be more than twice the amount of other minimum payments under the plan.”

The core of the CFPB’s proposal is a requirement that payday lenders underwrite these loans in a way that demonstrates that a borrower has the ability to repay them. In order to accomplish this, lenders would have to obtain certain baseline documentation including a written statement of the consumer’s net income and the amount of payments required to meet the consumer’s major financial obligations.

Could a lender get around these new regulations with simple changes to make sure that their loans don’t meet payday lending criteria? For example, could they simply stipulate that your payday loans have to be paid in 46 as opposed to 45 days? Not if the CFPB has its way. One of the final provisions of the new regulation gives the CFPB the power to examine a lending program to determine if it is set up with the intent of evading payday loan requirements. In making this determination, the CFPB is giving itself the power not only to examine the terms of a given lending program but also “the actual substance of the lender’s action as well as other relevant facts and circumstances” to  determine whether the lender’s action was taken with the intent of evading the requirements. I’ll bet you right now that if the CFPB is sued over this regulation, its authority to exercise this power will be challenged on due process grounds.

The good news is that if your credit union makes less than 2,500 of these loans a year it can provide short term loans to its members provided it does not generate 10 percent of its receipts from such loans.  The CFPB clearly listened to CUS that pointed out that they sometimes make short term loans that actually help members. In addition,  NCUA’s PAL loans are also exempt.

Now for some commentary. This is the type of proposal that will warm the hearts of consumer advocates who are justifiably disturbed by the abusive practices of some payday lenders. But whether or not it will have any discernible benefit for the people inclined to get these loans remains to be seen. In an ideal world, Dorothy clicks her heels three times and returns to Kansas. And in an ideal world, no one would be desperate enough to need usurious loans and no lender would be willing to make a living off such loans. But the reality is that all the regulations in the world won’t change the fact that there will continue to be people in need of short-term loans and lenders willing to profit from their misfortune.

Over the Summer I read the book “Hillbilly Elegy” by J.D. Vance. Vance grew up dirt poor in rural Ohio and eventually became an Ivy League trained lawyer. He uses the book to explain why so many white working class Appalachians are disillusioned and willing to turn to radical political solutions. Vance had the opportunity to work for a state senator in Ohio during the time that the state was debating a bill to ban payday lenders. His observation about the well-intentioned but misguided views of the bill’s supporters is worth quoting. “To them payday lenders were predatory sharks, charging high interest rates on loans and exorbitant fees for cashed checks. The sooner they were snuffed out, the better. To me, payday lenders could solve important financial problems. My credit was awful thanks to a host of terrible financial decisions (some of which weren’t my fault, many of which were). So credit cards weren’t a possibility…The lesson? Powerful people sometimes do things to help people like me without really understanding people like me.”

 

Entry filed under: Compliance, Regulatory. Tags: , .

Why I Hope This Blog Doesn’t Matter To You If Demographics Is Destiny, Is Your Credit Union Dead?

1 Comment Add your own

  • […] In 2017 the regulation promulgated by the CFPB sought to regulate payday loans by imposing underwriting requirements on lenders. Specifically, the bureau made it an “unfair and abusive practice to make payday loans without reasonably determining that a consumer had the ability to repay the loan.” Critics of this approach argued that baseline underwriting requirements would drive many payday lenders out of business and have the effect of driving payday lenders out of business without addressing the continuing need of some consumers to obtain quick short-term financing. The primary concern of most credit unions was originally that the regulation would keep them from making short-term loans at better rates than traditional payday lenders. The CFPB addressed these concerns by allowing credit unions to make short-term loans that complied with NCUA’s Payday Alternative Loan (PAL) criteria. […]

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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