The subject of short-term lending never fails to be divisive, with consumer advocates of all stripes lining up on totally opposite sides of the arguments – depending upon how they define their advocacy.
Advocates of consumer protection almost universally loathe the payday moniker and tend to view it as the last place where truly usurious lenders are allowed to ply their trade.
Advocates of consumer choice argue that adult humans are allowed to make choices about the types of products they want to contract for, even if those products come with high interest rates. And they argue that most people actually know what they are doing when they are doing it, and are not being duped into taking high interest-rate loans unsuspectingly.
Ironically, perhaps, both sides of the argument seem to basically want the same thing: for consumers to have reasonable access to credit products and a general expectation that those products are fairly priced.
However, from there, it all goes downhill as both sides of the argument devolve into mutual hostility — a fact demonstrated by the last Congressional Subcommittee hearing on the subject:
It was every bit as friendly and convivial as its name implies, as the CFPB’s David Silberman, acting Deputy Director of the CFPB, failed to convince most of the Congressmen assembled for the hearing that the CFPB’s regulatory goals for short-term lending were going to help consumers more than it might hurt them.
The battle is likely to rage for much of the year. If anything, the intensity can probably be counted on to ramp up from this point. The CFPB is likely a few weeks away from releasing its draft regulations for the short-term lending agency — at which point the fight is probably going to start to get really ugly.
And needlessly ugly, says Jamie Fulmer, Public Affairs Head for Advance American, the nation’s largest provider of payday loans.
Fulmer notes that contrary to what tends to get reported in the press, Advance operates in a heavily regulated fashion in 29 states and has no inherent objection to the CFPB and what they were established to do.
“What strikes us is that when the Bureau was established by Professor and now Senator Warren and Director Cordray, there was a lot of talk about the need not to dictate consumer choice but to provide a level playing field across a broad spectrum of financial services companies.”
So far so good, Fulmer notes, and sensible since the financial landscape has altered so radically over the two decades.
“Customers are redefining what are mainstream customer services. We think the type of loan we are type of providing falls strongly in the mainstream, because consumers find that they have an increased, yet regular, need for small dollar short-term credit,” Fulmer told PYMNTS. “We believe that was the correct approach and it was rooted in ensuring simplicity, transparency and full and complete and understandable disclosure.”
However, that goal didn’t stand up to the test of time, according to Fulmer.
An email scandal last year revealed that the CFPB and various consumer action groups were working perhaps questionably close together, he noted. Also, given the tenor of its recent statements on short-term lending, including a direct move to get small banks and credit unions plugged into the short term low dollar market, the writing is more or less on the wall.
“The regulator now seems intent on picking winners and losers in the marketplace and dictating those choices to the consumer,” Fulmer noted. “We think it should be the consumer who picks those winners and losers.”
Consumers, Fulmer notes, who everyone wants to protect but no one really understands. Most people assume that short-term loan customers are low income and unbanked, which is a big mistake since the majority have a household income higher than $55K a year and all have an active checking account and an income source. Almost all (90 percent) have a high school education and 45 percent have a college degree.
“These folks reside in the heart of the middle class,” Fulmer noted. “These people find themselves between paychecks with a short-term financial need. I spend a lot of time in our centers talking to our customers, and we find the customers who use our products are both satisfied and understand the costs.”
Which, he notes, at $15 per $100 borrowed, are better than they are going to do with a reconnect fee if they miss a bill or with the overdraft charge the bank will hand them.
“If you do sort of a blind taste test and ask them about the characteristics of the product — set fee for a time, $15 to borrow on $100 — if you take away the title and the labeling, individuals have a very different opinion than if you ask them what they think of ‘predatory’ payday lending.”
And that, he notes, is the biggest problem with the CFPB’s approach. It’s working to regulate consumer access to a product that it does not seem to understand all that clearly.
“I thought it was striking last week in the committee hearing when the Deputy Director of the CFPB — who is overseeing the promulgation of these short-term credit rules — was asked if he has ever been in a center. And he has never actually been to a center,” Fulmer noted. “You can read all the research studies in the world, but you’re not going to understand this topic until you know who the customer is, and who these products and services work for.”
Because the fact that consumers chose these products — and chose them because they need them — means that simply wishing away short-term lending is not a great idea.
“What happens in that situation is the unintended consequence is driving the consumer from the regulated market and forces them to turn to the illegal market that is dominated by offshore lenders that are subject to no rules or regulations.”
Because, Fulmer notes, though people like to say there is payday lending in 32 states and none by statute in 18, that is not quite accurate.
“The truth is 50 states have payday lending, it’s just that only 32 have payday lending in a regulated framework.”
Fulmer says as of now the Advance team is waiting on what rules the CFPB actually puts forth — and what they will mean for the businesses. We’ll keep you posted on their reaction when those draft regulations actually drop.