The Consumer Financial Protection Bureau has taken a cautious approach to its oversight of payday lenders so far, but is likely to issue new regulations covering the industry next year, according to several observers.
In November the agency began taking complaints on payday loans, complaints that are likely to serve as the basis for enforcement actions and new rules. The CFPB has already employed a similar strategy in recent months with regard to debt collection, first gathering complaints and then using them to issue a proposal.
"It's all part of a mosaic that we've seen repeated time and time again where the CFPB has taken an interest in a particular industry, the complaint portal opens up, then they start putting together aggregate data about the nature of complaints," said Alan Kaplinsky, who heads the consumer financial services group at Ballard Spahr. "Eventually, I would anticipate regulations are adopted by the bureau it's building up to a crescendo."
The signs of a looming regulatory crackdown against payday lenders are already apparent. The Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency finalized guidelines two weeks ago that restrict the use of deposit-advance products, which many see as very similar to payday loans.
Those guidelines came the day after the CFPB forced the payday lender Cash America International to pay up to $19 million to settle allegations that it robo-signed court documents, overcharged members of the military and took steps to impede examination by the agency.
State regulators are also moving against payday lenders. Benjamin M. Lawsky, the New York Superintendent of Financial Services, filed orders against 35 online lenders in August, some of which have since stopped operations. Federal banking regulators have reportedly begun scrutinizing bank relationships with such firms, causing several institutions to shut them down.
Yet the biggest step new federal rules that cover all payday lenders, particularly online lenders is still to come. While details on what they will say are unclear, they are likely to be sweeping, reflecting widespread complaints about the product from consumers and lawmakers.
"Right now is not a good time for payday lenders," said Ed Kramer, executive vice president of regulatory affairs at Wolters Kluwer Financial Services. "The bureau has a sophisticated group of examiners, supervisors, directors and enforcement attorneys who I'm sure are very aware" of payday practices "but certainly, it doesn't hurt to accumulate data about additional practices through the complaint portal."
Many observers said the CFPB's ability to take complaints will allow it to highlight the firms that draw the most ire from customers. Those firms are likely to be potential targets for enforcement actions. Yet the complaint database will also allow the agency to see what practices are common across the entire industry that are causing the most problems for consumers. Such practices will likely be the focus of any rulemaking.
"These are issues that cut across all types of payday lending, particularly online lending," Kaplinsky said. "I expect the CFPB will do another study on this by mid next year and then we'll see an advanced notice of proposed rulemaking and then proposed regulation by the end of the year."
The CFPB has been slower to take action on payday-type lending than other federal and state regulators. It waited until last month to take its first enforcement action, though many saw this as an initial CFPB priority.
But observers said the CFPB has been meticulous in its approach on payday loans partly because it does not want to inadvertently create a credit tightening on small-dollar advances or conflict with widely different state laws.
"The hesitancy flows from the fact that they recognize there's a need for a product like this but are concerned about the cycle of reoccurring debt and it being overused," said David Luigs, counsel in the banking group and co-head of the consumer finance practice at Debevoise & Plimpton. "I don't know if it will necessarily follow the complaints, enforcement and rulemaking process but it certainly could."
The CFPB will not comment on potential rulemaking or actions, but officials have spoken with caution on payday lending numerous times before lawmakers and other regulators. They have recognized there are problems, but officials have instead pointed to further studies rather than promising specific action.
"These are all serious risks that we need to be addressing in as comprehensive a way as we can," said David Silberman, the CFPB's associate director of research, markets and regulations, before the Senate Special Committee on Aging in July. "It was not the subject of our study but something we very much want to study."
Even in the Nov 6. press release announcing that the agency was collecting payday complaints, the CFPB was careful not to make it sound like they were trying to limit the product in the marketplace.
"Payday loans are often described as a way for consumers to bridge a cash flow shortage between paychecks or the receipt of other income," the agency said. "They can offer quick access to credit, especially for consumers who may not qualify for other credit, but can come at a high cost."
Regardless of the pace the agency has taken with payday lenders thus far, it's still a high priority, observers said. In September, CFPB Director Richard Cordray sent a letter to several Native American online lenders, denying their appeal to block a civil investigation into their online payday lending practices. That same month, it issued an updated exam guide for payday lenders that noted how its examiners will look for potential harm against military personnel.