It promised to crack down on the expensive payday loans and the companies that provide those types of services. It now appears the Consumer Financial Protection is doing just that very thing. The companies, however, are fighting back. This week, and as the result of a new report, U.S. payday lenders came together to complain about the way they were collectively portrayed by the consumer watchdog group. Before long, though, support came for the lenders.
Rhetoric, Not Facts
The Community Financial Services Association of America got behind the payday advance companies. This trade group sides with the lenders and is now conducting its own internal investigations.
Not only are the data demonstrably incomplete and misleading, but the conclusions, and specific language within the report seem aligned with the type of rhetoric that more often comes from advocacy groups that are not always driven by facts,
the industry group wrote in a letter to CFPB Director Richard Cordray.
They also said that the new findings were based on just a “small segment of the industry” and that any crackdown by the government agency would result in more consumers turning to unlicensed lenders that tack on any kind of interest rates and fee structures they wish. This would result in greater risks of fraud or identity theft.
Even if Cordray and camp aren’t worried about upsetting this one aspect of the financial sector, there’s no denying that CFPB has payday lenders scurrying for ways to stay out from under the regulatory authority. Already, the group is preparing to take “significant actions” to better protect consumers, ensure greater oversight and put into place tougher compliance guidelines that will likely include tighter fees and limitations on interest rates. Those rates can easily equate to 300% or more. The report says the primary goal is to “protect consumers from the payday lending industry” – definitely not words that industry wants to hear.
Payday Loans and Similar Products
Along with payday loans, the report also weighs in on similar loan products now being offered by banks – including some of the larger national banks. If these financial institutions were hoping to break away from being grouped with the payday loan companies, they were disappointed since the report draws many comparisons and ultimately reads that there is “not much difference between the two (financial) products”.
There’s another interesting statement within the letter to Cordray. One of the authors of the Dodd Frank law, Barney Frank, said a few years ago that telling adults what to do with their own money is a mistake and that despite the fact “some will spend foolishly”, it’s not the job of the government to prevent them from doing it. Dodd made the comment during a debate about licensing businesses to allow internet gambling.
If the Bureau is worried, it’s not showing. It’s yet to respond to the letter. Could be that it’s too busy putting into place those new restrictions the lenders were hoping to avoid. Part of what makes this so interesting is the fact that it’s not only the CFPB that’s reining these companies in, but there are actually several government agencies, including the Federal Deposit Insurance Corporation as well as the Office of the Comptroller of the Currency. They too are playing a role in defining the new changes. In fact, in the report released by CFPB, it specifically says that all three of the agencies are “assertively using supervisory authority to impose new restrictions on deposit advance products.” It also says,
by contrast, while emphasizing the importance of compliance with applicable law and mitigation of risks to consumers through the design and operation of such products, the Board appears to be deferring to the CFPB in respect of imposition of new restrictions.
The guidance proposals focuses on safety and ensuring the products being offered aren’t going to worsen an already less than ideal solution these consumers often turn to. This, according to the report, is a result of, “in large part from the absence of traditional credit underwriting”. Despite banks not willing to offer those traditional products, such as credit cards and in some instances bank accounts, they’re more than willing to offer the significantly higher payday loans.
The report continues and says that the high cost products and short payment cycles come together to pose a risk of becoming “trapped in a cycle of high cost borrowing over an extended period of time”. There’s even a term for it: churning. It’s akin to “loan flipping” and referring to it as predatory isn’t off the mark. Cordray says these types of loans are predatory.
What the changes will include, if CFPB gets its way, are familiar to many. Your mortgage closing process including documents such as Truth in Lending, Electronic Fund Transfer Act, Truth in Savings and Equal Opportunity Act were all necessary – though time consuming. This, says the report, will allow for more opportunities for a consumer to pause the process and if any information in these disclosures results in his decision to wait before going through the payday loan, then its purpose has been served.
Specifically, the proposals make mention of Section 5 of the FTC Act, which prohibits unfair or deceptive acts or practices (“UDAP”). Marketing materials and operational practices for deposit advance products may compromise UDAP, so transparency is crucial. For those companies that do not clearly and fairly describe the terms and conditions, possible risks, limitations and other considerations, fines may be instituted. Finally, the government wants these disclosures re-signed each time a consumer renews his loan. New language should be written to cover payday loan extensions.
How do you view payday loan companies? A necessary evil or predatory in nature? Share your thoughts with us and let us know what you think about the latest efforts from the Consumer Financial Protection Bureau. Is it going far enough to protect consumers or should it step back and allow any of us to “spend foolishly” as Barney Frank believes?