The Changing Nature of Lending
Why Payday Lenders Are Moving Toward Traditional Consumer Lending Models
February 27, 2015
According to the Center for Responsible Lending, since the payday lending industry started in the 1990s, it has established more than 22,000 locations that originate an estimated $27 billion in annual loan volume. It's big business. And there's constant debate about whether or not consumers truly understand what they're getting into when they take out a payday loan.
It's no wonder payday lenders get a lot of attention from regulators and advocates. In its effort to protect consumers, the Consumer Financial Protection Bureau (CFPB) has introduced several new laws and regulations, including caps on the amount of interest that can be charged and fixed fees that are easier for the consumer to understand. With the continuing attention and scrutiny, payday lenders have two choices: get out of payday lending or rethink their business model. Many are doing the latter.
Instead of the typical one-payment loan, we're beginning to see a multi-payment product from payday lenders. We're also seeing a change on the length of the loan. Normally, a payday loan is paid in full on an agreed upon date, usually just a few weeks from the loan origination, but now we're seeing borrowers choose six months to two years for the payback term.
Another trend we're seeing is online applications - borrowers can skip visiting a brick and mortar payday loan business. This expands the reach of the payday lender, potentially giving them access to more and possibly better qualified borrowers. Will it lower their overhead cost and will that savings be passed along to the consumer? That’s yet to be determined.
Automatic decisioning capabilities make it quicker for the borrower to receive their money (or not receive their money). The new consumer loan model offers terms that match the paycheck frequency and help the borrower budget. There are many options making it easier for the borrower to pay including on-line, convenience stores, and even super market kiosks.
Are these changes good or bad for payday lenders? What about consumers? That's still up for debate. In general, the perception is that payday loans are bad for consumers and payday lenders are more concerned with profit than in fair business practices. If that's the case, then consumers aren't voicing their concern. According to an analysis of complaints to the CFPB, roughly 1 percent of the consumer complaints are related to payday loans. There were far more complaints related to mortgages, debt collection and credit cards, which together make up more than two-thirds of the total complaint volume. The CFPB's data is not unusual. Of the more than 2 million complaints collected by the Federal Trade Commission in 2013, payday loans made up less than 1 percent.
The Community Financial Services Association of America, an organization established to promote laws and regulations that protect consumers, while preserving their access to credit options, offers advice on best practices for payday lenders. CFSA encourages full disclosure, compliance with all applicable laws, truthful advertising, consumer responsibility, the right to rescind, appropriate collection practices, and extended payment plans. They discourage rollovers and encourage responsible collection practices.
The truth is that millions of Americans rely on payday loans to meet their short-term credit needs. Those credit needs won't disappear if payday loans are eliminated. The best we can do as an industry is continue to advocate for fair business practices. Rather than look for loopholes and ways around the new regulations, find ways to offer short-term credit in straightforward, understandable products.
We haven't heard the end of this debate. It's a good idea to stay tuned to CFSA and CFPB for the latest news and developments in the payday lending arena.