WASHINGTON Payday lenders told the Consumer Financial Protection Bureau on Tuesday that they will accept new regulation so long as it does not "cripple" the industry and credit availability.
Speaking at a CFPB field hearing in Nashville, several payday lenders said they recognized that they should face similar restrictions to those placed on banks by the banking regulators on small-dollar, short-term loans.
All types of small-dollar, short-term lenders need "to be encased under the same framework of regulations that are equal and consistent," said Jamie Fulmer, senior vice-president of public affairs at Advance America, on a panel. "We need to be looking at the customer who has a need for short-term credit; what their options are in that marketplace; how they evaluate what those options are; and then build a regulatory framework around the customer."
The Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency issued guidance on deposit-advance products last year at the same time that the CFPB issued its first study on the payday loans. It released a follow-up study on Tuesday that focused on lenders which allowed payday loans to repeatedly roll over. The study concluded that more than 80% of payday loans are rolled over or renewed within two weeks. More than 80% of those borrowers who rolled over loans ended up owing as much or more on the last loan they took out than the amount they originally borrowed.
The CFPB is expected to target rollovers as it writes new rules on payday loans.
"As we look ahead to our next steps, I will frankly say that we are now in the late stages of our considerations about how we can formulate new rules to bring needed reforms to this market," said CFPB Director Richard Cordray at the hearing. "We continue to grapple with all aspects of these issues."
But some payday lenders were concerned that the agency would go too far by capping the interest rate at 36%, a figure used by Congress to restrict short-term loans to military personnel. Payday lenders argue that, unlike banks, they only offer smaller-dollar loans typically around $500 which means they would make very little money if the interest rate was capped based on such small amounts.
"What this [36% cap] equates to in our industry is a $1.18 on every $100 borrowed which is not enough to cover overhead costs such as rent, water, lights, salaries," said one audience participant who said they worked for Advance America. "I am all for imposing regulation to help consumers have fair and transparent regulations so that they know what they're getting into and make it a little bit more affordable to get out of. But what I am not for is unfair, un-transparent regulation that will be crippling to this industry."
Though audience members largely represented the payday lending industry, some consumer advocates said that the CFPB needs to ensure borrowers have the ability to repay the loan and should cap the interest rate and fees on such loans.
"The industry says they want to be regulated. They're willing to be licensed; they're willing to agree to best practices rules and things like that. But the one thing the industry will never agree to is a regulation on the interest rate," said an audience member who identified himself as an attorney representing consumers. "To me, it's a little dishonest to say we're willing to be regulated but yet we're not willing to be regulated on the most important aspect of this."
Interest rates and fees are arguably one of the most sensitive topics regulators have grappled with when it comes to placing restrictions on payday lending. But there are other areas the CFPB seems to be focusing on, including electronic payments and shoddy collection practices for payday loans.
"Moreover, we have found that some lenders use the electronic payment system in ways that pose risks to consumers. These practices can hinder consumers from getting out of debt or can leave them entirely unable to prioritize the payment of their various debts in ways that would leave them better off," Cordray said at the hearing. "Our examinations also show that a troubling number of these companies engage in collection activities that may be unfair or deceptive in one or more ways. These activities that we have found include using false threats, disclosing debts to third parties, making repeated phone calls, and continuing to call borrowers after being requested to stop."
The CFPB may potentially also require a "cooling off" period for when consumers can renew or rollover a loan, as well as limiting the number of consecutive rollovers.
The guidance issued by the OCC and FDIC last year requires banks to allow at least one monthly statement cycle to elapse before offering another small-dollar loan. But even that can create complications for consumers in need of credit, said one academic on the panel.
"My most recent paper shows that extending the length of the payday loan makes no difference in the probability of whether people default on their loan or roll over," said Paige Skiba, an associate professor of law at Vanderbilt University. "It's a very difficult question on the appropriate regulation of payday loans. I see more drawbacks to many of the proposals."
Cordray has repeatedly told the industry and lawmakers that the CFPB will find the right balance in keeping the product available in a safe way for consumers.
Some outsiders have speculated that the CFPB is perhaps taking longer to issue rules on payday loans because it's cognizant of harming small-dollar, short-term credit availability.
"The purpose of all this additional outreach, research and analysis on these issues is to help us figure out the right approach to protect consumers in the marketplace for payday loans," Cordray said. "We want to ensure they will have access to a small loan market that is fair, transparent, and competitive."
The CFPB is expected to unveil a proposal to rein in payday lending in the second or third quarter of this year, according to an analyst note released Tuesday by Isaac Boltansky of Compass Point Research & Trading.
"Following our initial read of the CFPB's report as well as Director Cordray's prepared remarks, our sense remains that the CFPB is mindful that payday firms can be the lenders of last resort for many borrowers but the agency remains intently focused on the regular and repeated use of payday loans," Boltansky said in the note.