War-Gaming The Future Of Small-Dollar Lending

A year ago, the future of short-term, small-dollar loans in the U.S. — better known colloquially as payday loans — was rather grim. The CFPB was a few weeks away from releasing new draft regulations, and the money was on regs that would by and large neuter the industry.

When the draft rules were released in early June 2016 — all 1,400 pages of them — that concern became a certainty.

The new regulations, despite all the verbiage, can be summarized into four big changes for short-term lenders nationwide:

Lenders will be required to establish a borrower’s ability to repay before extending the loan.

Individual loan payments per pay period must be limited to a level that would not cause financial hardship.

Payday lenders are not to allow consumers to reborrow immediately or carry more than one loan.

Lenders can attempt to directly debit payments from borrowers’ accounts a limited number of times in the event that there are not sufficient funds to cover the loan payment.

“This has the potential to decimate an entire industry,” one payday lending executive told PYMNTS shortly after the rules dropped. “By their own admission, in their own documents, they say 65 percent to 85 percent of the industry will go away.”

And while that potential looked firmly on track to become a reality in early 2017, things took a few rather unexpected turns right as 2016 dissolved into 2017: The CFPB lost in a federal court, with a three-judge panel ruling that its independent structure is essentially unconstitutional (that decision is now being heard by all of the judges in the D.C. Circuit), Donald Trump won the White House and the Republican party essentially found itself in charge of both houses of Congress and most state governments.

As a result, the CFPB is looking a good deal more vulnerable than it did even six months ago. And if one were to ask their Magic 8-Ball about the fate of those payday lending regs, the answer one would most likely get at this point is “Ask again later.”

So, we’re not asking the 8-Ball; we’re asking the experts.

This year, at Innovation Project 2017, we’ve assembled an all-star team to handicap the future of a multi-billion industry that provides alt-lending services to roughly 6 percent of American adults. Leading that conversation will be long-time short-term lending investor Paul Purcell, Principal at Continental Advisors, with Patrick O’Shaughnessy, CEO at Advance America; Kirk Chartier, EVP at Enova; and Bryan A. Schneider, Secretary of the Illinois Department of Financial and Professional Regulation, giving a 360-degree view of its future.

Paul Purcell dropped by to give Karen Webster a preview of the conversation to come — about what and who might emerge to fill in the gaps if the regulations of doom actually come through.

The Uncertainty Challenge

The fundamental challenge right now, Purcell noted, is all the uncertainty. What could be worse, he suggested, when the industry you’re in has a 65–85 percent chance of certain doom?

“I think when we talk to Patrick [O’Shaughnessy] and Kirk [Chartier] a big part of the answer you are going to hear about operating in this environment is that it’s miserable. It’s a crazy situation and a hard way to run a business because you just never know what day the other shoe is going to drop,” Purcell noted.

But it’s also a fallacy to think that part of the misery is that regulations are new to the industry. In fact, Purcell noted, payday lending as an industry isn’t hostile to being regulated, despite the fact that the conversation typically implies that the options going forward are either going along with the CFPB’s intentionally destructive rules or operating in a Wild West where there are no rules.

Which is plainly false since, long before there was a CFPB, there was the FTC, OCC and FDIC that were all tasked with payday lending oversight.

“The FTC has been all over short-term lending,” Purcell reminded Webster. “A lot of good disclosure has come out of that, and there have been huge settlements. There are glaring examples of people who have been fined and criminally prosecuted. The narrative around this product set has always been flawed.”

But the situation as it exists now, Purcell noted, is different. The CFPB is essentially trying to abolish the practice through regulation, which is very different from how every other regulator has approached the industry.

“Will the rule be pulled back?” Purcell asked hypothetically. “Right now, [The] PHH [case] is now going to be heard by the entire D.C. Circuit, most of the people [in high-level CFPB positions] have left and we don’t know what President Trump is going to do with Director Cordray. I don’t think that the Bureau is going to finalize the proposed rules and push them through, but that is my guess looking at the playing field — because I don’t know how they could practically do it.”

But, Purcell noted, the problem is there are a lot of known unknowns when it comes to payday lending, which is why there will be so much to talk about at IP on March 16.

What Should Happen (Spoiler: Better Innovation)

The problem with the current situation, Purcell told Webster, is that, when rules are being pushed from an advocacy perspective and not with any reference to data, consumers and lenders both lose.

That’s a terrible way to write a rule in general, Purcell noted, and especially terrible in this instance because it is stifling innovations that could make payday lending better for consumers. Data has uses, he noted. It allows lenders to tailor better products, better monitor how many loans a customer has, lower overhead costs so the loans themselves could be less expensive and on the whole try to compete for customers by offering a better product.

He also suggested that the regs, as written officially, create an incentive for lenders to come up with “innovations” that allow them to operate around the regulations, potentially setting up scenarios where really predatory lenders are innovating away at finding loopholes.

“We want innovation around competitive offerings,” Purcell emphasized.

The purview, Purcell said, should rest with the states.

“We are already seeing a big uptick in activity in state legislatures that have been dormant for six years. Some are looking to open [the industry] up more, and others are looking to tighten it. And that’s probably the best because, at the end of the day, the states are closest to the consumers. They can work with their licensees on a jurisdictional basis. Just using one blanket basis for making a rule, I think that is a very dangerous thing to do because the needs of consumers in different jurisdictions are different.”

Though, right now, they all have one need in common — a need to know what comes next.

And while we can’t promise a full tea leaves reading at IP, we can give you a very good idea of what the shape of things to come is.

From those who stand to gain — or lose — the most as the innovation versus regulation debate rages.

Come on, you know you want to be there to hear it all live — unscripted and off the record — and only at Innovation Project. Register to nab your spot, while you still can.