Payday lenders are one of the last financial players in the U.S. market to escape new regulations protecting consumers, but that may not be for long. Banks and other lenders are now operating under new mortgage rules that force them to verify a borrower’s ability to repay the loan. A new set of standards also creates a safeguard against lawsuits for banks and other lenders that stick to a strict debt-to-income ratio and other qualifications for a mortgage loan.
Even banks that offer small dollar, non-residential loans have to worry about federal rules that could come back to bite them. A few banks pulled away recently from offering high interest, small-dollar loans after regulators issued a warning and said they would scrutinize such loans for their affordability and the consumers’ ability to repay.
Payday lenders may soon find themselves falling under regulatory rules designed to protect consumers as well.
At a hearing in Nashville recently hosted by the Consumer Financial Protection Bureau, more than 400 people showed up, many of them employees of payday lending firms hoping to defend the industry against the very real threat of regulation.
They wore yellow stickers, some of which said: “My credit. My choice.”
Freedom to choose, access to credit for all, and innovation in the financial marketplace was the theme for payday lenders that day. It might not carry much weight with regulators since it was the same argument made on behalf of subprime residential loans and creative products such as interest-only and no-doc mortgage loans.
Richard Cordray, the director of the CFPB, said in prepared remarks that the agency is in the final stages of considerations in formulating new rules to bring “needed reforms to this market.” He said the agency intends to make sure consumers who can afford to take out small-dollar loans get the credit they need without jeopardizing or undermining their financial futures.
Payday lenders are not the only source of small dollar, high cost credit (automobile title lenders are another), but they have proliferated in recent years with a fairly successful business model predicated on getting direct access to a borrower’s bank account, taking money before other creditors such as the landlord or the electric company are paid. The CFPB has been collecting thousands of complaints from payday borrowers and released a study it conducted for the past year of payday lending companies’ records showing that 80 percent of payday loans are rolled over, or renewed, by the borrowers in 14 days. Three out of five payday loans are made to borrowers who end up paying more in fees and interest than the amount borrowed, the agency said.
Cordray used the example of a woman named Lisa who lost her job at a hospital and got a payday loan to help pay her rent. She ended up taking out $800 in loans and paying $1,400 back, but still hasn’t paid off all the loans and fees.
Molly Fleming-Pierre, the policy director for Missouri Faith Voices, a non-profit in Jefferson City, Missouri, came to the hearing to talk about a disabled woman with a third grade education she said was targeted for a payday loan outside her workplace. She ended up paying $15,000 to payday lenders before an advocate intervened. A disabled veteran whose wife could no longer work paid $30,000 to payday lenders and yet the couple still lost their home, she said.
An oversupply of bad mortgages made to borrowers who couldn’t afford their loans, which were ultimately packaged into supposedly top notch securities and sold to investors around the world, was blamed in large part for the financial crisis. It’s arguable whether payday lenders could sink the U.S. economy, but the CFPB’s mission isn’t to worry about the U.S. economy, it’s to worry about consumers.
Now, payday lenders may have to start worrying about them, too.