Regulation

CFPB’s Shifting Payday Loan Talk

The Consumer Financial Protection Bureau/Congress dustup is over, and the age of the 24/7 news cycle demands that we move on to other things.

But wait a moment.

Within the payments space, there was, and remains, some red meat to chew over (or, if you prefer, seitan). The head of the CFPB, Richard Cordray, said during testimony on The Hill yesterday (April 7) that FinTech companies will likely be a significant presence in making payday loans (or smaller dollar loans) to consumers.

The movement to embrace those loans will bring in a few types of firms to help extend such credit to consumers, said the director, with the impetus coming from the first federal rule introducing guidelines coming within months, as has been widely reported.

General expectations for the new rule hold that those interest rates that have raised headlines — the ones that top hundreds of percentage points — would be sharply curtailed amid greater scrutiny and with the vicious cycle of taking out new loans to pay the old ones short-circuited in the process. Thus, there could be the expectation for a bit more rationalization of an industry that serves 12 million people and is worth as much as $39 billion each year, according to some estimates.

The firms can be classified, said Cordray, along the lines that would include payday lenders who make sure to conform to the aforementioned rule once it is put in place and community banks or credit unions that broaden their reach into alternative lending products. Finally, there’s the potential to include (of course) FinTech companies that are on the cutting edge of offering new business models, as noted by The Wall Street Journal.

No surprise that the lenders themselves and some proponents in Congress have been looking for a tamping down of the new rule’s reach. The arguments they wield focus on complexity and cost, with both going up in the wake of new regulations. The statements by Cordray were limited yesterday but came with the offhand admission that the lending process in the small loan pond is a “tricky” one (and does that mean that progress will come about through trial and error?). The path to at least some innovation has been cleared a bit as the CFPB has been opening the door to a broader range of services being provided to consumers, especially through technology.

One broad shot across the bow came last month when the agency said that digital payments firm Dwolla misrepresented how consumer data was protected. Dwolla paid a $100,000 penalty. And, said Cordray yesterday, the Dwolla case shows that the CFPB is serious about mandating that FinTech players deliver on the scope of their promised services, especially as the business model of serving subprime lenders shifts from brick-and-mortar storefronts in lower-income locations toward online, data scoring models. As the CFPB director noted: “We believe it will not be appropriate for new FinTech startups to be getting an advantage in the marketplace because they are arbitraging the regulatory system, because they are not complying and they are not taking seriously what the banks and regulated institutions have to do.” In other words, batten down the hatches, ye FinTech upstarts. ​

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Our data and analytics team has developed a number of creative methodologies and frameworks that measure and benchmark the innovation that’s reshaping the payments and commerce ecosystem. The May 2019 AML/KYC Tracker, provides an in-depth examination of current efforts to stop money laundering, fight fraud and improve customer identity authentication in the financial services space.

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