New US payday loan rule will hurt industry, boost banks: agency

WASHINGTON (Reuters) – Revenue from the $6 billion payday loan industry will decline due to a new U.S. rule restricting lenders’ ability to take advantage of short-term, high-interest loans, and a Much of the business could shift to smaller banks, according to the country’s financial consumer watchdog.

A place of money lending in a file photo. REUTERS/Files

The Consumer Financial Protection Bureau (CFPB) on Thursday issued regulations requiring lenders to determine whether borrowers can repay their debts and capping the number of loans lenders can make to a borrower.

The long-awaited rule still has to survive two major challenges before taking effect in 2019. Republican lawmakers, who often say the CFPB’s regulations are too onerous, want to overturn it in Congress, and the industry has already threatened of lawsuits.

Most low-income earners use what are called payday loans — small dollar advances usually repaid on the borrower’s next payday — for emergency expenses. Lenders generally do not assess credit reports for loan eligibility.

Under the new rule, industry revenue will fall by two-thirds, the CFPB estimated.

The current business model relies on borrowers having to refinance or renew existing loans. They pay additional fees and interest that increase lenders’ profits, CFPB director Richard Cordray said in a call with reporters.

“Lenders actually prefer customers who will re-borrow repeatedly,” he said.

People caught in this cycle of debt can end up paying the equivalent of 300% in interest, the bureau found in a study it conducted for five years after the rule was written.

The rule will devastate an industry serving nearly 30 million customers a year, said Ed D’Alessio, executive director of the Financial Service Centers of America, an industry trade group.

“Taking away their access to this line of credit means many more Americans will have no choice but to turn to the unregulated lending industry, overseas and elsewhere, while others will simply make bounced checks and suffer the burden of greater debt,” he said. noted.

INTRODUCING BANKS INTO THE MIX

The agency reduced the final version of the regulations to focus on short-term borrowing, instead of also including longer-term, installment debt. It exempted many community banks and credit unions from ensuring that borrowers can repay their loans as well.

Both measures could make it easier for financial institutions to fill gaps left by payday lenders closing shop under the new rule.

“Banks and credit unions have shown a willingness to serve these customers with small installment loans, and they can do so at prices six times lower than payday loans,” said Nick Bourke, director of the financing project. for consumption by Pew Charitable Trusts.

The Office of the Comptroller of the Currency on Thursday lifted restrictions that prevented banks from making small dollar loans, which will further ease the transition.

The main banking lobby group, the American Bankers Association, applauded the CFPB and the OCC, and the trade group representing independent banks, Independent Community Bankers of America, said the exemption provides flexibility in making loans. sustainability to customers in need.

But the Community Bankers Association representing retail institutions said only the smallest banks were eligible for the exemption, which applies to lenders making 2,500 or fewer short-term loans a year and drawing no more than 10% income from these loans.

“The CFPB sniffed out an opportunity to provide assistance to the millions of Americans in financial difficulty,” said CBA President Richard Hunt.

Reporting by Lisa Lambert; edited by Leslie Adler and Cynthia Osterman

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