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By Jeff Bater
May 31 — The Consumer Financial Protection Bureau (CFPB) is expected to release a rule this week that could upend the payday lending industry, but it remains unclear whether banks will step into the void absent clearer guidance from regulators.
The watchdog agency has scheduled a June 2 field hearing in Kansas City, Mo., on small-dollar lending and, while it hasn't made an announcement saying so, it is expected to release its long-awaited rule that day tracking a draft proposal released in March 2015.
The draft included provisions that would require lenders to verify borrowers' ability to repay, limit the number of times borrowers take out loans and provide for a cooling-off period to prevent debt traps, and offer affordable repayment options (59 BBD, 3/27/15).
“The payday industry as we know it isn't going to be the same once these rules are finalized,” Isaac Boltansky, an analyst at Compass Point Research & Trading, told Bloomberg BNA in a phone interview. “I think what we'll see is a massive wave of consolidation as smaller payday lenders simply aren't able to comply with the new compliance burden. I think we're going to see a massive wave of consolidation in the industry and a shift in volumes to other players, such as installment lenders and, potentially, some banks.”
The payday lending industry has warned such rules are likely to drive them out of business. “CFPB rules will essentially eliminate the regulated short-term lending industry,” Jamie Fulmer, a spokesman for payday lender Advance America told Bloomberg BNA in an e-mail. Some payday lenders may shift to pawn lending, Henry Coffey, a Sterne Agee CRT analyst predicted in a May 27 note.
Banks aren’t necessarily going to enter the market, in part due to 2013 guidance from the Office of Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. (FDIC), which warned of the risks of small-dollar, short-term loans, Fulmer said (226 BBD, 11/22/13). He said a number of banks dropped their previous payday loan alternative, the deposit advance, after the strict guidance.
Many banks took the guidance as an indication that it would be easier to get out of the field entirely rather than worry about whether they were appropriately conforming to supervisory expectations, Brent Ylvisaker, an associate at Dorsey & Whitney, told Bloomberg BNA.
“I don't know if there's going to be a huge impact on the banking industry as a result of these rules unless the CFPB can maybe work with the banking regulators in issuing some revised supervisory guidance with respect to these small-dollar loans,” Ylvisaker said.
Jeremy T. Rosenblum, a partner at Ballard Spahr, agreed the 2013 guidance “really put a damper on this whole product.”
It's certainly conceivable that the FDIC and the OCC are going to just take the position, ‘Hey, if you can comply with the CFPB rule, that's good enough for us. They've really considered this in-depth. They've done studies. There's an agency that really is supposed to be protecting consumers,'” Rosenblum told Bloomberg BNA.
Rosenblum added, “I would tell you [that] if one of my bank clients came to me and said, ‘I'm interested in that,' I wouldn't throw cold water on the idea. I'd say, ‘You need to go in and talk to your supervisor and get their reaction.'”
The draft proposals outlined by the CFPB last year also covered high-cost, longer-term credit products of more than 45 days where the lender collects payments through access to the consumer’s deposit account or paycheck, or holds a security interest in the consumer’s vehicle, and the all-in (including add-on charges) annual percentage rate is more than 36 percent.
Nick Bourke, an expert on small-dollar loans for Pew Charitable Trusts, said he has talked to several banks about the looming CFPB rule, and some have indicated to him they could enter the space with clear guidance by regulators.
He referred to an approach to the debt trap protection requirements for longer-term products that was included in the CFPB outline. That option would allow lenders to make a longer-term loan given certain conditions. One condition would be that the sum the consumer is required to pay each month is no more than 5 percent of gross monthly income. Also, the lender could not provide more than two such loans to the consumer in a 12-month period. The loans would have a minimum duration of 45 days and a maximum of six months.
“The CFPB’s rule is critical, because there are currently no federal guidelines in place defining a safe small-dollar installment loan, and banks are waiting for that guidance,” Bourke said. “If the CFPB rule does not include clear regulatory guidelines for affordable payments and reasonable durations, banks will be shut out of this market because they will not be able to automate the origination of loans, which is essential to keeping costs down and allowing fair prices.
“Clear regulatory guidelines and automated, low-cost loan origination are the key for banks to be able to enter the small installment loan market profitably,” he added.
David Pommerehn, senior counsel and vice president at the Consumer Bankers Association, told Bloomberg BNA he thinks the CFPB intends “to provide for something that will allow banks to offer an alternative to payday lending.”
“However, what they've outlined doesn't provide for many realistic options for banks to play in this space,” he added.
For instance, the outline includes an ability-to-repay analysis Pommerehn called “fairly extensive.”
“What they're requiring is something akin to a mortgage underwriting process where you would verify income and do a complete analysis of living expenses and financial obligations of the consumer,” Pommerehn said.
The costs involved could frustrate the ability of many financial institutions to offer the loans, he said. “The return on a $500 loan is certainly not the return you're going to get on a $500,000 mortgage. And you're doing basically the same underwriting.”
Furthermore, Pommerehn sees problems with the 5 percent payment-to-income option that is part of the CFPB outline. “If you look at somebody who's making $25,000 a year and limit the payment-to-income to just 5 percent, you're talking about a very small loan to meet their needs and only being able to use it twice year, which frustrates this type of lending,” he said. “Consumers want to be able to use loans as they need to use the loan. You certainly wouldn't tell a credit card customer they could only use a credit card twice a month or twice a year.”
Pommerehn said that from the industry's perspective, safeguards are needed to help consumers who get caught in cycles of debt.
“We would implore the CFPB to work closely with the industry to come up with realistic, sustainable products that could be offered to consumers within the depository industry, which is regulated and supervised, in order to meet the needs that aren't going to go away,” he said.
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