The CFPB is not overly fond of payday lenders — a category of financial services that, in fairness, almost no one really likes because there is something unseemly about high-interest lending.
But people who need payday loans like them or, better to say, have needs strong enough that considerations such as how much they like something are less than wholly relevant since they like the idea of missing their rent, not buying their kid shoes or not repairing their car a good deal less.
The CFPB thinks it has a way to square that circle. It might be trying to extinguish payday lenders, but it is hoping to replace them with small banks and credit unions offering better alternatives for small, short-term loans.
Richard Cordray, director of the watchdog agency, said it is discussing ways to make it easier for banks and credit unions to offer “small-dollar” loans.
This is something of a switch, since the previous regulatory stance on this was that traditional banks should stay far, far away from such high-risk lending. And, of course, the participants in the $38.5 billion-a-year, short-term lending industry probably have feelings about being legislated out of existence and then replaced.
The final proposed payday lending rule is not out yet, but a draft version of a rule regulating payday lending released about a year ago would require lenders to verify borrowers’ ability to pay, limit the number of loans borrowers could take out and require the lenders to offer affordable repayment options.
So, is the CFPB ready for a simultaneous fist fight with the nation’s banking regulators and the short-term lending industry?
Given our knowledge of the CFPB, yeah, it is.
“I personally believe banks and credit unions can be low-cost providers of small-dollar loans,” Cordray told The Wall Street Journal. “I think that working with banks and regulators involved, there would, and should be, an ability for them to offer decent products.”
And the CFPB is not alone in trying to regulate — and possible replace — payday lending. The Treasury Department has included in its 2017 budget about $10 million in funds to help community development financial institutions extend small-dollar loans.
Banks have offered something like payday loan products in the past. Wells Fargo and U.S. Bancorp offered a lower interest rate version until 2013 when guidelines issued by the FDIC and the Comptroller of Currency (OCC) warned banks away from such lending, calling it risky (but didn’t out and out ban it).
According to WSJ, a rule has yet to be formally proposed. Spokesmen for the FDIC and OCC declined to comment, as did a spokesman for Wells Fargo. U.S. Bancorp didn’t respond to a request for comment.
The latest push comes as part of the CFPB’s efforts to steer lower income customers into the financial mainstream and away from the high-cost, high-risk products that exist to serve the financially marginal in the U.S. In early February, the agency asked banks to offer low-cost, no-overdraft checking accounts to help bring more customers into the financial system.
House Republicans, long critical of the CFPB, are scheduled to grill a top agency official on Thursday (Feb. 11) at a Financial Services subcommittee hearing entitled, “Short-term, Small Dollar Lending: The CFPB’s Assault on Access to Credit and Trampling of State and Tribal Sovereignty.”
According to David Pommerehn, vice president and senior counsel at Consumer Bankers Association, banks are interested in this kind of lending, in theory, but it has to be well-designed enough so that it is actually useful to consumers and feasible for lenders.
“First and foremost, the CFPB needs to understand that whatever they do, it needs to be communicated and coordinated with the prudential regulators,” he said.
Payday lenders, on the other hand, have pointed out that the CFPB is being unrealistic about the possibility of banks stepping in to provide the services that alternative financial providers, like payday lenders, check cashers and money wiring services, do.
“[These services] are inconsistent with current models of retail banking that depend on streamlined self-service and electronic transactions,” said Dennis Shaul, chief executive of the Community Financial Services Association of America, a trade group for payday lenders.
Others disagree, noting that such models could be folded into the traditional banking template.
“They already own the customer relationship. They are much more efficient businesses with diverse product lines and lower costs of funds,” noted Nick Bourke, who has studied the payday industry at Pew Charitable Trusts.